Every investor is a long term investor until the stock market tanks, says certified financial planner (CFP) with My Financial Advisor, a wealth management firm. You get to know his mental make up only by now he reacts to the market fall. If he stops or discontinues his regular investments, it becomes clear that he doesn’t have the stomach for risk. Also, he can’t think of his investments in the long term.
Financial experts have many such stories identify the so called long term investor from others. This is because most of them aver that planning investments with a long term perspective is vital to one’s financial well being. Though one often comes across well meaning advice about long term planning people often fail to stick to it especially when it comes to equity investments.
It is not equity the only long term investment. When one invests in real estate, public provident fund or employee’s provident fund, one knows they are long term commitments. For example, PPF is a 15 year account and EPF can be of 30 years, depending on one’s working life. In all these, people have long term view.
They would not quit these investments based on short term trends either due to emotional reasons or because they can not be easily liquidated. However, when it comes to equity an instrument only meant for long term investors people take decisions based on short term trends in the market.
However, advisors add that one shouldn’t conclude that people haven’t realized the importance of a long term investment perspective. People who have been investing for, some time in the market realize the importance of long term commitment. For example, when the market was down, the impression was created that most people would discontinue their SIPs, but it was not the case. Most seasoned investors continued with their investment program, as they perhaps realized that it was beneficial to buy stocks when the market was down.
In short, if you have not taken a long term view of your financial needs and planned your investments accordingly, you are very unlikely to achieve your goals.
When we talk about a life goal like retirement or child’s education, we are talking about at least 10-15 years ahead. If you do not include the possible return over that period or the impact of inflation on your corpus, you would not get a realistic picture. In such a scenario, a person will have to face unpleasant surprises in the last moment, when he wouldn’t be in a position to take remedial actions.
Having a long term perspective will also come handy when you reallocate assets in your portfolio to mitigate the volatility in a certain segment. Here is an example of how having a long term perspective could help prune the portfolio in times of uncertainties.
When the stock market was down, one can decide to include gold in the portfolio of many clients. We look this decision on the basis of our view that the stock market may take a long term to recover because of the uncertainties in the global economy and gold would add the much needed to the portfolio.
Long term investment players may gain:
1) Long term investment not in equity alone
2) Investments in realty, PPF, EPF also long term
3) Long term investors stays put in SIPs, irrespective of market movement
4) Impact of inflation and volatility neutralized over along period.
5) Long term perspective becomes useful while reallocating assets in a portfolio.