Why is Long-Term Thinking a Must in Investing?
Do not sell out of fear and panic. Keep your emotions in check.
Question: Hi! I have been reading your 2016 Outlook series on your blog. It’s great to read the insights of experts as well as reports that the Philippines is a ‘fundamentally sound economy.’ As a beginner investor though, a large part of me is panicking. I started investing when the PSEi was in the 7,400s. Just a week ago, it went below 6,100. I am a long-term investor, and I have read that I shouldn’t let the present volatility get the best of my emotions and sell out of panic. What’s a beginner like me to do? – Carlos via e-mail.
Answer: Hi, Carlos! Thank you for your e-mail. Many investors who have just entered the stock market are panicking because of the continuous downtrend, but as I mentioned in my previous column, the market is behaving the way it is supposed to. It is reacting to perceptions of investors, whose prevailing mood is that of fear and panic. When investors panic, they sell their shares and this drives prices down.
However, you said it yourself that you are a long-term investor, and I like that you mentioned that. That is the key here. Knowing that you are investing for the long-term is the guiding principle you need to endure the tumultuous roller coaster ride of the market.
Here a few points as to why long-term thinking is a must in investing and why you should stick to a long-term mindset:
It determines your investment objective
People invest in various investment instruments depending on their objectives. Some want to grow their money to pay for an upcoming wedding while others want to start accumulating wealth for retirement. As a long-term investor, you have different objectives.
You may be investing to have enough money to build a home or save for retirement.
It’s important to have a long-term mindset when it comes to investing because it allows you to filter out unnecessary concerns.
As a long-term investor, the current downtrend should not cause you sleepless nights.
You have more than 30 years to wait the market out and recoup your losses or better yet, continue to grow your investments. Long-term investing in the market determines your financial objectives in such a way that you know what purpose your profits will play. As a long-term investor, you can let your money sit in your investments instead of withdrawing them (at a loss) out of panic.
It guides your investment direction
In relation to the above, having a long-term mindset guides your investment direction and decisions. As a long-term investor, you’ll put your money in investments different from those of the short-term investor. Short-term investors will put their money in, say, money market funds or bonds. You, as a long-term investor, may put your money in stocks instead. Knowing that you are a long-term investor gives you direction regarding where to invest and how long to stay invested in the market.
It keeps your emotions in check
Listening to emotions—it’s one of the most common mistakes beginners make when it comes to investing.
For those who weren’t in the market during the 1997 Asian financial crisis or the more recent 2008 financial crisis, the continuous downtrend at present may seem hopeless to new investors.
However, if you look at the historical performance of the Philippine Stock Exchange index (PSEi) from 1986 to 2016, the PSEi follows an up and down cycle, where the next ‘high’ is always higher than the previous ‘high.’
This is where your long-term investing mindset comes into play.
Being in the market for the long term (for a minimum of 10 years) allows you more than enough time to weather bear markets.
Historically, bear markets since the 1930s have an average duration of 18 months. If you’re investing for the long term, you have more than enough time to hold on to your investments until the downtrend reverses into an uptrend, signaling the end of a bear market.
In relation to letting your emotions get the best of you, if you have a long-term investing mindset, short-term fluctuations and volatilities should not bother you. Do not sell out of fear and panic. Keep your emotions in check. Remember that you have time on your side.
Randell Tiongson is a Registered Financial Planner of RFP Philippines. He is one of the most sought after speakers in Personal Finance and Columnist of Philippine Daily Inquirer and Money Sense Magazine. He is best selling book author of Personal Finance Step-by-Step Guide.
Source: http://business.inquirer.net/206532/why-is-long-term-thinking-a-must-in-investing
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