Planning your long-term investment objectives
Selecting the most appropriate investment products and undertaking the right planning at the right time to minimise the amount of tax you pay are key to accumulating wealth over the long term. Add to this general economic factors, business conditions and political events, these are just some of the things that can cause uncertainty and volatility in the markets. Over any given time period, the economy can also go through a series of ups and downs.
Cash savings vulnerable to erosion by inflation
Some investors often think of cash as a safe haven in volatile times, or even as a source of income. But the ongoing era of ultra-low interest rates has depressed the return available on cash to near zero, leaving cash savings vulnerable to erosion by inflation over time. With interest rates expected to remain low, investors should be sure an allocation to cash does not undermine their long-term investment objectives.
However, investors who have left their cash in the bank may have missed out on the impressive performance that would have come with staying invested over the long term. Of course, there are also reasons to invest conservatively – market volatility and preserving the funds you have, just to name a couple. But, there is also a trade-off between risk and reward.
The more risk, the more reward potential
Investing is often said to be a long-term activity. Why is this, and what should you consider? Firstly, the more risk, the more reward potential; the less risk, the less reward potential. It’s ironic that minimising market risk can increase the probability of a long-term retirement income shortfall.
Even missing out on a few years of saving and growth can also make an enormous difference to your eventual returns. Compound interest is essentially interest on your interest, or, put another way, growth on your investment taking into consideration the previous growth on that same investment. Albert Einstein said, ‘Compound interest is the eighth wonder of the world. He who understands it, earns it…he who doesn’t…pays it.’
Reinvesting the income from your investments
Reinvesting income can be another major factor in long-term returns for investors. You can make even better use of the magic of compounding if you reinvest the income from your investments to boost your portfolio value further. The difference between reinvesting – and not reinvesting – the income from your investments over the long term can be enormous. Reinvesting income from your investments enables you to buy more shares which will potentially grow in value and boost your overall returns. In simple terms, your returns also earn returns.
It’s important not to forget that volatility in financial markets is normal, and investors should be prepared upfront for the ups and downs of investing, rather than reacting emotionally when the going gets tough. Market timing can also be a dangerous habit. Pullbacks are hard to predict, and strong returns often follow the worst returns. But some investors may think they can outsmart the market, or they let emotions push them into investment decisions they later regret.
Diversify to help you achieve your desired returns
While markets can always have a bad day, week, month or even a bad year, history suggests investors are much less likely to suffer losses over longer periods. Investors need to keep a long-term perspective. The last ten years have been a volatile and tumultuous ride for investors, with natural disasters, geopolitical conflicts and a major financial crisis.
When it comes to creating an investment portfolio to help you maintain your quality of life during retirement, it’s essential that you diversify to help you achieve your desired returns while managing risk. Basically, diversification means balancing the investments you have in your portfolio among different categories, classes and industries so that in a given economic situation, they don’t all go up or go down together.
Reducing your overall investment risk over time
The term correlation is used to describe how one type of investment behaves in relation to another. If two types of investments behave similarly, they are said to be positively correlated. If they behave differently, they’re negatively correlated.
So, whether the market is bullish or bearish, maintaining a diversified portfolio is essential to any long-term investment strategy. A diversification strategy can help you achieve more consistent returns over time and reduce your overall investment risk.
INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE. THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.