A long term deposit of money can make us think of different investing methods, which can give consistent, good and positive returns over long periods.
When the overall investment environment is dull, deploying money for the long term is the last thing on peoples’ minds. They worry about the losses in their investments and refuse to invest more funds. Going for a 1 year fixed maturity plan seems like a more attractive option than an equity fund for a long term. Investing is about thinking for the long term: all other money related ventures are speculation or end up in a loss or returns lower than savings bank interest. Here are some reasons of investments for the long term that can be useful.
Long term investment helps us deal with abnormalities (on the negative side) in a more professional manner. Capital markets indicate the times we live in. It would have seemed that there was no hope when the world wars broke out, when the gold standard was given up or when the oil and interest rate uncertainty percolated the world. However, the sustaining factor through these events has been the ability of people to rebuild recreate and bounce back. If we give up on the ability of the human race to innovate, we can call it the end of the world. Long term is to see the crisis around us as another low in the cycle. It strengthens the belief that it too shall pass however painful it turns out to be.
Long term thinking relieves us of the burden of timing the markets before making an investment decision. Market timing is not easy. Economic events can impact the markets in different ways, making it difficult to foresee how an investment will behave in the near term. An uncertain environment is bad for some investment options and good for others. A long term orientation tells us that the better strategy is investing return oriented schemes from time to time after studying the markets. If we think that a portfolio which holds a diverse set of assets will do well, we have an investment plan that is undisturbed by the immediate developments.
A focus on product and their performance has hurt several investors’ wealth. When we buy an IPO, an equity share, a bond, a new mutual fund, or a property we take on the risks of selecting the right product. In the long term, equity investments do well, but not all equity shares perform well. The focus on products can also make us into buying the wrong products at the wrong time.
When there was boom in IT, tech stocks were much in demand, tech funds were launched every other day and tech company IPOs flooded the market. If people had simply focused on asset allocation and made product selection they would have been better off than blindly buying IT stocks on the advice of Tom, Dick and Harry.
One can be realistic about what to expect from investments if we learn to think for long term. We will then understand that the long term rate of growth for our wealth would be a more conservative and grounded number in the range of 8-15% depending on how we allocate our investments across these assets. If we remain focused on the overall 8-15% return we will achieve it by holding a diversified portfolio.
One can become a good bargain punter if he or she keeps a long term view. If we realize that cycles go up and down. Abnormally high or low returns in a few asset classes, is more the norm than exception. We can stop from buying more when the prices are high, while refusing to give up good expectation when the prices are low.
As we have time on our hands, immediate losses can be traded off for longer term gain. Since we have a diversified portfolio we know that some component is in money, even if others are not. The reason that we have a focus on asset allocation, we can continue to invest even when others are not doing well. Trying times present the opportunity to ask ourselves about the kind of investors we are and whether we have the long term orientation.