Paul's Insights: Is a long term strategy still relevant?
Why focusing on the fees you pay, the investment choice you make and your ability to add to your portfolio is important.
We live in a world of change. Technology is driving big shifts in what we do and how we do it. Interest rates are at historic lows. And after many years of significant growth, home values in some of our largest cities are on the decline. Against this backdrop of upheaval, is long term investing still relevant?
I think so. History tells us just how effective a buy-and-hold approach can be.
Over the last year for example, Australian shares dished up total returns (including dividends) of 3.45%. Extend that timeframe out to five years, and returns have averaged 8.12% annually. But an investor with a 10-year horizon could have pocketed average annual gains of 11.79%.
It’s a compelling case for thinking long term. But giving sharemarket investments years – not just weeks or months – to grow, calls for more than patience.
Success with long term investing demands a diversified portfolio. Today’s rooster can quickly become tomorrow’s feather duster.
By way of example, if you’d bought the minimum parcel of 400 Commonwealth Bank shares back when it first listed in 1991, you’d have paid $2,160. That same parcel of shares today would be worth $28,908, and this doesn’t include the value of annual dividends (Commbank has a dividend yield of 5.98%).
The challenge is that not every company is around long enough to make it as a long term investment. Former sharemarket darlings like Pasminco and Babcock and Brown are testimony to this. It explains why investment guru Warren Buffett, who is a fan of long term investing, looks for companies that will still be in business in ten or 20 years.
This highlights the need for diversity, something that can be hard for direct investors to achieve. An easy and potentially low cost way to diversify is through a managed share fund, which can offer access dozens of listed companies.
That said, don’t expect your investments to do all the heavy lifting. Making regular contributions can be the thing that really sees the value of your investments skyrocket. Even Warren Buffet could have trouble growing your wealth if you only tuck away $100 each year.
Importantly, be prepared to block out market noise. Sharemarkets go up and down frequently, and if you follow the news on a daily basis it can be easy to subscribe to the Chicken Little view that the sky is about to fall in.
Rather than focusing on what you can’t control, embrace what is within your reach – the fees you pay on investments, the choice of investments at your fingertips, and your ability to add to your portfolio when you have the funds to do so.
Paul Clitheroe is Chairman of InvestSMART, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.