Saturday, June 6, 2009

Maximise returns from long term investment

“Every investor is a long-term investor until the stock market tanks,’’ says Amar Pandit, certified financial planner (CFP) with My Financial Advisor, a wealth management firm. “You get to know his mental make up only by how he reacts to the market fall. If he stops or discontinues his regular investments, it becomes clear that he doesn’t have the stomach for risk. Also, he can’t think of his investments in the long term,’’ adds Pandit.

Financial experts have many such stories identify the so-called long-term investor from others. This is because most of them aver that planning investments with a long-term perspective is vital to one’s financial well being. Though one often comes across well meaning advice about long-term planning, people often fail to stick to it—especially when it comes to equity investments.

“It is not that equity is the only long-term investment. When one invests in real estate, public provident fund or employee’s provident fund, one knows they are long-term commitments. For example, PPF is a 15-year account and EPF can be of 30 years, depending on one’s working life. In all these, people have long-term view,’’ says Pandit.

“They wouldn’t quit these investments based on short-term trends, either due to emotional reasons or because they can’t be easily liquidated. However, when it comes to equity—an instrument only meant for long-term investors—people take decisions based on short-term trends in the market,’’ he adds.

However, advisors add that one shouldn’t conclude that people haven’t realised the importance of a long-term investment perspective. “People who have been investing for some time in the market realise the importance of long-term commitment.

For example, when the market was down, the impression was created that most people would discontinue their SIPs, but it was not the case,’’ says D Sundararajan, investment consultant, Trendy Investments, an investment advisory firm. “Most seasoned investors continued with their investment programme, as they perhaps realised that it was beneficial to buy stocks when the market was down,’’ he adds.

In short, if you haven’t taken a long-term view of your financial needs and planned your investments accordingly, you are very unlikely to achieve your goals.

“When we talk about a life goal like retirement or child’s education, we are talking about at least 10-15 years ahead. If you don’t include the possible return over that period or the impact of inflation on your corpus, you wouldn’t get a realistic picture,’’ says a wealth manager in private sector bank. “In such a scenario, a person will have to face unpleasant surprises in the last moment, when he wouldn’t be in a position to take remedial actions,’’ he adds.

Having a long-term perspective will also come handy when you reallocate assets in your portfolio to mitigate the volatility in a certain segment. Sundararajan offers an example of how having a long-term perspective could help prune the portfolio in times of uncertainties.

“When the stock market was down, we decided to include gold in the portfolio of many clients. We took this decision on the basis of our view that the stock market may take a long term to recover because of the uncertainties in the global economy and gold would add the much needed stability to the portfolio,’’ he says.

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