The investment game resembles test cricket. To win, you must have patience, discipline, perseverance, planning, and strong determination. Like a test match, when victory is determined by how many sessions a team wins, investing requires winning the small fights along the way to achieve success in the end.
Long-term investment justifies instilling these characteristics. A long-term investment is a way to go if you want to develop a substantial retirement corpus, save for your child’s higher education, or beat inflation. How should this be done? Let us investigate.
1. Understand Your Financial Objectives
Before you begin long-term investing, consider your overall financial goals. Any investment’s ultimate goal is to attain a goal. As a result, unless you have a clear knowledge and vision of your goals, you are unlikely to master the rigors of long-term investing.
Divide your objectives into three major categories: short, medium, and long-term. While short-term goals can be accomplished in six months to a year, medium-term goals can take three to five years to complete. Long-term goals, on the other hand, have a time horizon of ten years or more.
Once you know what your goals are, you can estimate how much money you’ll need to achieve them. It will assist you in organizing your funds and, more significantly, will drive you to save and invest in them. So go back to the drawing board, write out your life goals, take stock of your finances, and get started.
2. Begin Investing Early
Because long-term investment necessitates discipline and patience, it is critical to begin early. An early start instills financial discipline and allows compounding to take effect. Compounding has a multiplicative effect on the generation of wealth. It also aids in the accumulation of a larger corpus.
For example, if you are 25 and want to retire at the age of 60, a 5,000 INR SIP in an equity mutual fund with an annualized return of 10% will help you accumulate a corpus of INR 1.9 crore. If the investment is delayed for five years, the corpus will be INR 1.13 crore.
As a result, being an early bird has advantages. It permits your money to increase over time and allows you to offset inflation.
3. Purchase instruments with a long lock-in period.
Another strategy to stay invested for a long time is to buy instruments with a long lock-in period. The lock-in serves two functions. It prohibits early withdrawals and permits compounding to take effect. Certain financial instruments, such as the public provident fund (PPF) and the National Pension System (NPS), have lengthy lock-in periods.
PPF has a 15-year lock-in period, whereas NPS funds are locked in until you reach the age of 60. The former, on the other hand, allows for early withdrawals under specific conditions. However, unless absolutely necessary, you should avoid withdrawing.
When you reach the age of 60, you can withdraw 60% of your NPS corpus as a lump sum and utilize the remaining 40% to purchase an annuity plan that will provide you with a pension. A unit-linked insurance plan (ULIP) is another financial product to consider investing in. ULIPs offer both insurance and investing in a single product and have a five-year lock-in period.
However, in order to maximize your returns from ULIPs, you must stay invested for a long time, at least five years.
4. Invest in the stock
Equities are highly volatile, particularly in the short term. They can, however, be as lucrative and have the potential to outperform inflation in the long run. Panicking and quitting in response to short-term market swings can turn theoretical losses into actual losses.
The allure of generating inflation-indexed returns from equities drives many investors to stick with their assets for extended periods of time. They are also compensated for this. For example, when the World Health Organization (WHO) designated Covid-19 a pandemic in March 2020, many investors remained committed despite seeing their earnings fall into the red.
Their tenacity eventually paid off, as markets recovered spectacularly well. Returns skyrocketed, and soon investors were sitting on huge profits. Equity investment also develops the patience required to stay engaged for lengthy periods of time.
5. Disregard Market Noises
Markets are full of opinions and points of view that seem to fly thick and fast, especially when things go wrong. Suddenly, everyone becomes an expert and shares their thoughts. Noise must be avoided when investing in the long run because they serve as a distraction and can derail your plans.
If the circumstance calls for it, consult with your financial advisor, who is familiar with your financial plan, positioning, and aspirations. Market noises can push investors to act on impulse, resulting in poor investing judgments. As a result, keep an eye on the larger picture and stay focused on your objectives.
6. Expand your horizons
While individual brilliance can help you win a game or two, winning requires a team effort. The same is true for long-term investing. You cannot, or should not, rely on a single financial instrument.
Diversify your assets across asset types – including equities, bonds, and gold – as well as within asset classes. Spread your stock assets between large-cap, mid-cap, and small-cap funds, for example. Diversification stabilizes your portfolio and balances risk and return.
An efficient risk-hedging method is an optimal diversification. Optimal diversification, a fundamental financial idea, also boosts returns since market events affect each asset class differently.
In conclusion
Long-term investing necessitates regular review. This is due to the fact that circumstances change over time. The evaluation will assist you in weeding out laggards and tailoring your investments based on your objectives. Long-term investing has numerous advantages. Doing things correctly can help you stay on the stable financial ground and on your way to financial freedom.
