Staying focused on your long-term financial goals can be difficult when stock markets plummet and news pages are filled with images of Wall Street despair. But unless you’ve got the skills to be a professional trader, taking the long view is crucial to protecting your financial future.

There have been numerous examples of stock market volatility in recent times. This year the markets fell sharply after Britain voted to leave the EU and again when Donald Trump won the US presidential election. In both instances, the markets soon bounced back.

The power of equities  

Over the past couple of decades we’ve experienced wars, recessions, financial crises and natural disasters, but equities have still done well. The FTSE 100, for example, has risen by 519% since April 1984 despite several big bumps along the way.

‘The adage that time in the market beats timing the marking is one that should be heeded by retail investors,’ says Ryan Hughes, head of fund selection at AJ Bell.

‘In the short-term, markets can be volatile and unpredictable, with sentiment and specific events having an impact on share prices without necessarily being related directly to the underlying performance of the business.

‘Ultimately, over the long-term it is earnings, profit and growth that drive share price performance and that is why it is better to take a long-term perspective when it comes to investing,’ adds Ryan.

‘Taking a short-term approach often turns you into a trader rather than an investor and there can be little coincidence that Warren Buffett, the most successful investor of all time, takes a very long-term view to his investments.’

Bad timing

Trying to time when to buy and sell shares is notoriously difficult, even for professional investors.

There is a very high chance you’ll sell investments after they’ve performed badly and buy investments after they have already done well, thereby missing out on the gains.

‘The result is that you could end up buying at the top of the market and selling at the bottom and having a thoroughly miserable experience along the way. Unfortunately this is what too many investors do,’ warns Patrick Connolly, head of communications at independent financial adviser (IFA) Chase de Vere.

Filtering the noise

Dan Brocklebank, director at asset manager Orbis Investments, says maintaining a long-term focus is hard when investors are bombarded with news and commentary about events which on the surface appear to impact the prospects for all investments.

‘It is actually very difficult to filter out from all of this noise what, if anything, really matters over the long-term. Evolution has also meant that we are highly primed via stress responses to react and try to run away from perceived threats,’ he explains.

Brocklebank suggests the best approach is to have a solid plan in place long before short-term falls happen. He says investors could write down their long-term goals and assess investment results against this framework, rather than looking at how they have done in any given year.

For particularly volatile periods, Peter Chadborn, a director at IFA Plan Money, recommends looking back over the previous five years in order to put short-term volatility into context.

‘Viewing investment behaviours over the short-term will make volatility appear greater than it is when looking at the bigger picture over the long-term and therefore can cause unnecessary anxiety for the investor,’ he adds.

Staying firm

Most experts recommend taking a 10 to 20-year view when buying investments and sticking with them through the ups and downs, unless your circumstances or objectives change significantly. Connolly points out that each time you change your investments you’ll incur dealing fees.

‘You shouldn’t switch out of a fund just because it has performed badly. Instead you should fully understand why it has performed badly and then whether that is likely to change in the future, before you make any decisions,’ he says.

Connolly reckons tracker funds are the ideal long-term holding because you don’t need to worry about significant underperformance or a fund manager leaving. The funds simply track the performance of an index.

‘Those who are investing for longer periods can afford to take more risk; this usually means investing more in equities. This is especially the case if they’re making regular premiums, which many who are saving long-term will be,’ he says.

If you want to add some capital protection to your portfolio you could consider adding fixed interest, property and absolute return funds. They might provide more security and will diversify your portfolio, thus spreading the risk.

Boring is best

Fund managers who take a long-term view of investing include Terry Smith, manager of Fundsmith Equity (GB00B41YBW71), and Nick Train, manager of CF Lindsell Train UK Equity (GB00B18B9X76). Those funds have five-year annualised returns of 21.3% and 16.7%, respectively.

‘Both of these managers could be considered as useful holdings for those looking to generate long-term returns from a portfolio,’ says Hughes.

Regardless of which investments you choose, it’s important to be patient. Unfortunately there is no such thing as a get-rich-quick scheme and no way to become an instant millionaire outside of winning the lottery.

Hughes concludes: ‘Investing is a long-term business where patience is one of the most valuable attributes and, as George Soros said, “Good investing is boring”.’ 

DISCLAIMER: Daniel Coatsworth, who edited this article, holds shares in Fundsmith Equity.

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