TomorrowMakers ™

Financial Planning

Why long term investments are better

25 November 2016
Think long term investments are not worth the wait? Here’s why you are wrong.
 

Whenever I travel, I like to befriend fellow travelers. It’s an interesting window to different perspectives. But, when they learn that I am a financial writer, all other conversations end. They begin to talk investments.

Related: Why you should start investing early

The queries are often similar in nature: They want to know if I can help with any interesting information on stocks for them to buy in the market. The common thread happens to be their hunger to make some quick money.

I have to often explain that investing is never about the short-term. If you buy or sell an asset in a short period of time, you are actually trading in it. There is a fundamental difference between trading and investing.

In fact, if you follow legendary investor Warren Buffett, you will learn that there is no concept like short-term investing. He also does not believe in the term ‘trading’.

When you invest in a particular asset, it is usually about the productivity that the asset would create. The value of your investment is linked to the intrinsic value of the asset you invest in. Usually, the market value and the intrinsic value of an asset move in tandem.

Related: Fact: equity investments are always more profitable in the long term

These are not my words. I have attempted to explain the wisdom spread by Buffett through his letters to shareholders every year.

Let’s test this wisdom with an example you are familiar with.

If you plot the value of the S&P BSE Sensex from 1979 (when they started calculating the benchmark index) to today, you will notice that it is mostly an upward journey. From a level of 119 in 1979, it has grown to about 28,000 in 2016.

So, if you began investing based on the S&P BSE Sensex, your investment would have grown in line with the performance of the index. Yes, there are years when Sensex ends lower than the previous year. However, over the long-term, it is always an upward movement.

What is the problem?

Investments need time to grow. Just like any tree that you expect will eventually give you a fruit to savor.

Our dreams, though, barely give us that time. We want to travel the world; knock-off a so-called ‘bucket list’; own a beach house or an apartment in a busy metro; give our children quality education, and retire rich. Each of these needs money to be fulfilled at different points of time in life.

This is where the problem lies: People often get confused when they juxtapose long-term investments with short-term dreams.

Clearing the air

Treat all your dreams as goals. That is a good beginning. Once you sit down and make that assessment, you will know what you are investing for. There is a lot of literature on financial planning online. Reading a bit more than what is necessary will allow you to refine your goals. Seek help from your financial planner to define your goals. There is lot of help available in financial planning today online and offline. It was not the case a decade ago.  

Shift in attitude towards money

Most people need to make a fundamental shift in their attitude towards money to begin with. Typically, people invest the surplus amount after accounting for their expenditure each month. Our mind deserves to be trained to make a subtle but significant change in this equation. We need to spend the amount left after making investments towards our dreams. The discipline will allow you to realize these dreams rather than letting them remain dreams.

How to go about it

If you go the Warren Buffett way, you need to invest each year in a fund that tracks the performance of a benchmark index. It was not possible earlier to accurately track the performance of the Sensex or the NSE Nifty. You had to buy shares that make up these indices in a similar proportion to their weight in these indices.

Related: Direct Mutual Funds- should you add them to your investment portfolio?

However, since 2002, Indian markets have witnessed the emergence of index-based funds like exchange-traded funds or index funds that track the performance of benchmark indices like the S&P BSE Sensex. So today, it is possible to track the performance of the 30 companies that form that index more accurately.

A last word

I am not a financial planner. However, as a journalist, I interacted with those who sell financial products or manage financial assets every day. As writers, who are not selling any financial product to you, our knowledge is based on our conversations with people who are in the business of managing your money.

 
 
 
 

"An investment in knowledge pays the best interest"

- Benjamin Franklin -

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