Long-term investing pays off

What does it mean, in today’s world, to invest long-term, that is to buy and hold funds or managers for years? The question is a serious one in that investment performance is measured over very short periods and then comparisons are made. Such analysis fails to account for whether a strategy has had time to realize its goals, let alone whether competing strategies have had a chance as well.

The short-term rating of investments has two serious problems: it forces many managers to push for short-term results, often leading them to drift from their announced strategy (or turn over their portfolios each year, which increases transaction costs and taxes due), and it leaves investors looking for results too soon, so that they may end up selling what may be a great long-term investment because a competitor looks better in the short run.

How do you guard against this? First, understand that the volatility you see in the short term dampens down over time. That is, swings in the stock market could be plus or minus 30% in a year but come down to plus or minus say 5% for a 5 year annualized return. Second, realize that you are giving your strategy a fair chance by waiting, rather than panicking or responding on impulse. Third, realize that the real way to ultimately achieve good returns from the market is by waiting. The uncertainty built into the market means that it rewards those who can wait, and they are the ones with lower trading costs and less taxes due.

How do you find managers to help you invest this way? Look for those with low turnover of key people, who invest in their own funds, and who have the conviction to stick to their strategy even when it is out of favor. They often buy a stock that continues to go down in price before it ultimately turns up, over time.

So be a contrarian, invest for the long term!

Let us know if you have questions or comments. Thanks,

Steven

One thought on “Long-term investing pays off

  1. A client reading this post correctly pointed out that the advice has to factor in age and proximity to retirement. The analysis should also consider other resources, such as a pension or potential inheritance.

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