While the importance of investing for the long-term cannot be overstated, a long-term horizon in isolation doesn’t add up to much.
“Is fund XYZ a good bet for 10 years?”
At Morningstar, we are often faced with such questions from investors in the equity funds segment. As an asset class, equities are best equipped to deliver over longer time frames. Hence, it’s good to note that investors are willing to stay invested for the long-haul. However, often the underlying assumption is that just staying invested for the long-term is good enough. But is there a flipside to such an investment approach? Can long-term investing ever be counterproductive? The answer is - Yes! Surprised? Read on.
Fill it, Shut it, Forget it
Remember the two-wheeler advertisement campaign. "Fill it, Shut it, Forget it" was the tagline used to convince prospective buyers of the vehicle’s prowess. Clearly, it struck a chord with some investors. They in turn continue to adopt a - “Fill the form, Sign a cheque and Forget it” policy while investing. At the root of this approach is a belief that staying invested over a longer time horizon, by itself, is a surefire way to financial success.
But what if the fund were to undergo a change, along the way. Say, a new portfolio manager comes on board and adopts a different investment strategy. As a result, the fund’s character undergoes a transformation. Perhaps in the new avatar, the fund may no longer be suitable for the investor. In such a scenario, the investor needs to ascertain if the fund still merits a place in his portfolio. Adopting the long-term approach blindly could potentially hurt the investor’s interests, rather than help him.
Time doesn’t always heal
Now consider the case of fund which is inherently flawed. In other words, the investor made a bad investment decision. Simply staying invested for the long-term won’t turn the fund into a better one. Passage of time doesn’t eliminate a fund’s shortcomings. An inferior fund stays the same, irrespective of the investment horizon. Yet again, staying invested for the long-haul could keep the investor from achieving his goals.
It’s not you, it’s me
At times, the long-term could prove to be a deterrent not because of the fund, rather because of the investor. Consider the case of a 40-something investor who invests in an aggressively managed fund. He can take on the risk associated with the fund in exchange for the prospect of earning above-average returns. Ten years hence, the fund’s investment proposition remains unchanged. However, the investor is no longer capable of taking on the same degree of risk. He has accumulated a fair sum of money over the last decade and now needs investments that are more attuned towards conserving wealth, rather than earning it. As a result, the fund may no longer be suitable for him.
Not cut out for the long-term
Then there are funds (like sector funds, for instance) which have a narrow investment universe. Typically, these funds are at their best, in shorter time periods, when the underlying sector hits a purple patch. Over longer time frames, they are unlikely to deliver desirable results.
Is long-term investing dead?
So is long-term investing dead? Should investors not have a long-term horizon? Not at all! For equity investors, the importance of a long-term investment horizon cannot be overstated. However, it should be understood that the long-term horizon in isolation, doesn’t add up to much. Among others, investors must also select funds that are apt for them, monitor their progress at regular time intervals and take corrective action, if and when required.
In the other words, the key to achieving financial goals lies in making informed investment decisions and doing so consistently over the long haul.
(Vicky Mehta is a senior research analyst with Morningstar)