Naz Financial

A Personal Financial Blog from Naz Miller

Why Long Term Is Best

long term investment strategy

I’m sure that, like me, you’ve noticed there’s a lot of uncertainty out there at the moment. Brexit. Trade wars between the USA and China. More Brexit. Political uncertainty in various parts of the world. Even more Brexit. So, with nobody any the wiser about what the future will bring, should you really be thinking about investing on the stock exchange now, or should you sit tight?

In Brief

I’m a strong believer that investing should be for the long term. Also, that markets and the economy have a tendency to rise over time. For investors, this should mean a positive return on investment, as long as you’re able and willing to ride out the inevitable ups and downs over time.

Time can be a great healer, for investments, too. I’m going to show you why I believe you should always look to the long term when considering an investment strategy.

Market Volatility

It’s hardly surprising that markets have displayed increased volatility in the last couple of years. Global uncertainty, though doesn’t necessarily mean it’s poor for investors. Volatility can also create opportunity.

After all, when you think about investment, it’s normal to expect risk and reward to go hand-in-hand. Equities are by their  very nature risky, so rewards will follow. As will volatility. To many, it’s a sign of a healthy, vibrant market.

Look at Market History

Throughout history we’ve seen periods of market volatility – ups and downs for a variety of reasons. Believe it or not, current volatility is actually still at the lower end of the long-term range. This graph shows global equity returns alongside volatility levels over the last 20 years.

Investors for the long-term can expect cycles – periods of falling prices followed by a recovery.

Many people will remember the dotcom bubble of 2001 and the global financial crisis of 2007. The effects of these events on the UK stock market are shown in the graph below, which compares the returns from holding cash in a savings account with investing in UK equities and reinvesting income over the last 30 years:

 

The two dips in the red line show how these crashes caused loss of value for investors. However, as the line rises we see recovery for those who stayed in it for the long term. It took six years for the stock market to recover from the dotcom crash, and four years and four months after the global financial crisis.

Markets tend to rise over time

Although past performance isn’t a reliable indicator of future performance, the red line does continue on an upward trajectory over the longer term. That’s why i always people take a long term view of investments. And there’s another factor to bring in here, too. That’s ‘compounding’.

Compounding

Compounding is one of the reasons long-term investing has the potential to give positive returns. This is the snowball-effect of your gains generating further gains.

In stock markets, compounding works by re-investing dividend income. Gains in value come from both dividends paid by profitable companies and stock value appreciation. Add the two together for a compound effect.

See the total returns from the UK stock market over 30 years, both with and without reinvested income. You can see how compounding over the long term has a significant impact on overall value.

Not surprisingly, the London Stock Exchange concur.

What about sitting tight?

While the temptation for some may be to try and wait out the storm, cash is seldom the best alternative for investing over the long term. Inflation erodes cash value, insofar as it exceeds interest earned. As an example, over the last 30 years, every £1 held would only actually give you 35p of spending power in today’s money.

And finally…

Yes, it’s volatile out there and uncertainty dominates our global political future. However, I see no reason not to invest in the stock market in the current economic climate, for the long term.

So if you have a long term perspective and can accept the fact that markets tend to rise and fall along the way, now is as good a time as any to invest in the stock market.

For more information or if you have questions about your investments, please contact me without delay.

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Naz Miller

I'm Naz and I'm a Financial Adviser. Prior to working in private practice, I spent 34 years working at Lloyds Bank in Cambridge and surrounding areas. My work has always focused on helping clients achieve their long-term financial objectives.

Glossary of Personal Financial Terms

AAA Rating

In short, AAA ratings (‘triple-A‘ ratings) are the highest credit rating available for an investment, such as a bond or company.

AAA ratings are issued to investment-grade debt that has a high level of creditworthiness with the strongest capacity to repay investors.

Similarly, the AA+ rating is issued by S&P (Standard and Poor) and is similar to the Aa1 rating issued by Moody’s. It comes with very low credit risk and indicates the issuer has a strong capacity to repay.