Article By David Curmi
When markets become volatile as they did earlier this year and more recently over the last few weeks, investors tend to become nervy about holding on to their equity investments. This is a natural tendency as fear of losing value takes hold. Is this the right strategy though? For some it may be and the answer lies in the long term objective coupled with the strategy being adopted. Short term traders, tend to try and use timing to enter and exit equity positions as a key component of their investment strategy. Given their short term outlook, getting the right entry and exit points are critical to optimizing returns. On the other hand long term investors are less sensitive to these elements and ignore daily or weekly movements, instead use a disciplined long term mindset to build wealth over the longer term. Taking a long term view, committing to regular savings and maintaining a structured and diversified portfolio are key cornerstones of building wealth over the long term.
Equity markets are in themselves volatile. They are driven by different factors, not all of them related to the underlying strength or success of the companies. Human emotions of greed and fear often play key roles, sometimes driving prices excessively in either direction. Currently the discussion on whether a bubble has built in the AI sector is a case in point. Investors are presently climbing a wall of fear. Time will tell but having a portfolio of diversified equities will not only offer protection but will provide the platform for recovery when inevitably this comes, as history has shown us that it always occurs. Trying to time the highs and lows on a regular basis generally tends to be more of a hit and miss game. In fact historical evidence has shown that time in the market is a far more powerful investment tool than timing the market for entry and exit points.
This is why it is important to use the volatility in the market to your advantage. Having a disciplined approach to putting money in the market, and avoiding the emotions of the ups and downs, especially when there is “blood on the street” in the markets is another key component to a successful long term investment strategy. Regular contributions into a wealth building strategy not only creates financial discipline, especially from a savings perspective, but also helps capture the power of compounding returns. A concept that has been described as the eighth wonder of the world. When this is coupled with a long term strategy stretching over the working life of an individual, the returns obtained can be transformed into substantial wealth, allowing the investor to retire comfortably with complete financial certainty.
Having a savings plan and financial discipline, whilst key elements, are only one side of the coin. The other being where those savings are invested. The role of a well structured and diversified portfolio, with a long term plan cannot be underestimated. It also needs to be dynamic. The structure and diversification ensures that the portfolio reflects the investment objectives of the individual. Diversification ensures that the portfolio is exposed to different asset classes, in different sectors, especially as not all asset classes perform well at the same time. Overlaying a dynamic approach ensures that the portfolio reflects not only the economic reality of the time but also that of the investor. Over time the profile of an investor changes. His needs, objectives, financial situation are all moving parts within the big picture. An investment portfolio must reflect this. Regular reviews where personal circumstances are assessed need to be held. These are the milestones where performance is reported and adjustments to the investment objectives and risk profile of the investor are discussed and implemented. This will help ensure that the portfolio and strategy are still valid.
Long term investing is not just about buying an investment and locking it away. It is about having a long term plan that brings with it discipline, structure and regular oversight. Not to react to the market noise and emotion but to ensure that the plan remains valid.
The information presented in this commentary is solely provided for informational purposes and is not to be interpreted as investment advice, or to be used or considered as an offer or a solicitation to sell/buy or subscribe for any financial instruments, nor to constitute any advice or recommendation with respect to such financial instruments. Curmi & Partners Ltd. is a member of the Malta Stock Exchange and is licensed by the MFSA to conduct investment services business.