Long-term investing: letting time do its work

03/09/2019

At M&G, we are strong advocates of long-term investing. Unless your investment horizon is only short term, we believe taking a longer-term approach – ignoring the day-to-day ups and downs of the markets – can better help you achieve your financial goals. Here are six steps to help time work in your favour when investing for your future.

Glossary

For explanations of the investment terms used throughout this article.

View the glossary

1. Identify your goals

Before investing, it’s important to know your goals, time frame, and how much risk you’re willing to take. In general, the more risk you’re able to accept, the higher the potential returns could be. However, higher risk investments may also incur larger losses too.

You should also ask yourself two other important questions. How much time do you have to allow your investment to grow? And how much money would you like to have at the end of your investment period?

Once you’ve worked out the answers to these questions, you can decide where to invest your money. Generally speaking, the longer you invest for, the better your returns are likely to be. That’s because, in the short term, markets can be vulnerable to unexpected news events or just plain old erratic investor behaviour.

The value and income from the fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested.

2. Diversify across different assets

If you keep all your savings in similar investments, you could be putting your money at too much risk, or missing out on potential returns. You’re usually better off diversifying – in other words, spreading your investments across a range of different asset classes. Having said that, diversifying your portfolio is not a guarantee of returns nor does it eliminate all the risks associated with investing.

Investing in a mixture of bonds, company shares (equities) and property, for example, can help to reduce the impact of unexpected ‘shocks’ on your portfolio. This is because the performance of different types of investments will go up or down at different times and at different rates. So your whole investment portfolio could be more stable over time if you take a more diversified approach and apportion across different asset classes.

It’s also important to stay diversified within each type of investment, as well as between them. For example, in the stockmarket, this means holding a mix of shares across regions, sizes of companies, and the sectors the companies operate in.

3. Avoid trying to time the market

Investing a single lump sum in a particular share or bond can be highly beneficial if you get the timing just right, but it’s very difficult to do in practice.

When market conditions are uncertain, it can be difficult to know the best course of action. It may be tempting to sell existing holdings, or delay making new investments and wait until markets feel less turbulent and prices are low.

You may be tempted to try ‘market timing’ – the practice of moving your money in and out of an investment to try and capture the performance highs and avoid the lows. In fact, this is extremely risky since you have to be right not just once, but twice – when you sell out of the market and again when you buy back in. Even the most experienced investors find this challenging.

During times of uncertainty, emotions can easily overcome sound investment decisions. So it’s best to stay focused on your long-term investment goals, and not be distracted by short-term news, or peaks and troughs in the market.

4. Smooth out the highs and lows

Investing at regular intervals can be a good idea to help smooth out the ups and downs of the market. As we’ve already said, timing the exact moment to enter or leave the market can be extremely difficult– you run the risk of investing at the top of a market cycle, or exiting at the bottom.

Buying at regular intervals means that the average price you pay can be lower than if you’d made one lump sum investment at the peak of the market. In other words, over time, regular investments can help smooth out the peaks and troughs.

5. Consider investing regularly

When you invest on a regular basis — whether it’s buying stocks and shares directly or by topping up your investments in a fund — you're taking part in what’s known as ‘pound-cost averaging’.

This is the practice of investing a fixed amount at regular intervals, regardless of the ups and downs of the markets. When the investment’s price goes down, you get more for your money, which can lower the average cost of each unit you’ve invested in. And of course the lower your ‘cost to invest’, the greater your potential rate of return becomes.

You can see this in the tables below, which show the number of shares purchased by a monthly investment of £100 as the relevant share price both rises and falls. As the share price rises, the investor buys fewer shares for each £100 investment. On the other hand, more shares are bought for £100 as the share price falls. This means that, on average, the purchase price paid is lower than the share price over the whole period that shares are being bought.

Regular investing in a rising market

  Investment Share price Number of shares bought
Month 1 £100 £1.00 100
Month 2 £100 £2.00 50
Month 3 £100 £3.00 33.3
Total £300 £6.00 183.3

Average share price: £6.00 / 3 = £2.00

Average price of shares bought: £300 / 183.3 = £1.64

Source: M&G, for illustrative purposes only

Regular investing in a falling market

  Investment Share price Number of shares bought
Month 1 £100 £1.00 100
Month 2 £100 £0.67 149.3
Month 3 £100 £0.33 303
Total £300 £2.00 522.3

Average share price: £2.00 / 3 = £0.67

Average price of shares bought: £300 / 522.3 = £0.54

Source: M&G, for illustrative purposes only

6. Keep an eye on your investments

It’s always worth taking a fresh look at your portfolio at least once a year to make sure it still reflects your original plan for your investments.

Over time, market fluctuations can throw your allocation of assets out of balance. When this happens, checking your portfolio gives you the opportunity to rebalance everything, and help keep your investments in line with your original goals.


Important information

When you're deciding how to invest, it's important to remember that past performance is not a guide to future performance, and that the value and income from the fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested.

Unfortunately we’re not able to give any financial advice, and the views expressed in this article should not be taken as any kind of recommendation or forecast. If you’re unsure about the suitability of your investment, please speak to a financial adviser.