Investing for the long term is an important strategy for anyone looking to build wealth and secure their financial future.
At times, global stock markets can be volatile and turbulent, and this can often provoke two different responses in investors – the desire to seek safety and withdraw from investments and hold funds in cash; or exit and then re-enter markets in an attempt to make quick gains through timing.
Both can be risky strategies, having the potential to lead to significant losses. Here we look at why it’s important for long term investors to stay invested, even during turbulent times.
Paying the price of inflation
Whilst cash is often considered a ‘safer’ option, holding too much cash comes with risks of its own. This is especially true in the high inflationary environment at present. Holding large amounts of cash whilst inflation is high can lead to the value of that cash being ‘eroded’ because its value stays static, whilst the price of good and services increases.
Withdrawing from investments as an emotional response to market dips means you could be cashing out at the worst time, after your investments have already made a loss. Then, when you wish to buy back into stock markets, your purchasing power has diminished, leaving you with fewer shares or units than you previously held. There can also be transaction costs that come with buying and selling stocks and shares to factor in.
Cash is an important part of holistic financial planning, and everyone should have a separate contingency cash pot, held outside of an investment portfolio, which can be accessed when required. This cash pot, together with a small cash allocation within investment portfolios, can provide some downside risk protection to overall wealth during market downturns.
Time in the market, not timing the market
Withdrawing from investments in the hope of timing the market on its way back up is notoriously difficult. It can be extremely difficult to predict when the market will turn around and when indeed is the best time to invest. The adage, “it’s not about timing the market, but about time in the market” has been proven over the years. Research shows that missing even 10 of the best days in the market could have a significant long-term effect on the value of an investment portfolio.
Staying invested through volatile markets means you are already best placed to take advantage of any market bounces, and to benefit from long-term growth. By remaining invested, you are ensuring your automatic future participation in any market recovery.
Portfolio diversification is key
Finally, it is also important to diversify your investment portfolio. This means investing across different asset classes and sectors, globally, to limit any concentration risk. Subsequently, you can benefit from gains made in one sector or geographical area, whilst limiting any losses made in another, so that overall, your investment portfolio remains profitable over the long term.
Ultimately, long term investing is an important strategy for anyone looking to secure their financial future. Remaining invested through turbulent markets, avoiding trying to time market peaks and troughs, and diversifying your portfolio can all help to ensure that your investments remain profitable in the long term. To discuss building a sustainable, long-term financial plan with one of our Chartered Financial Advisers, please get in touch.