“Before I start investing in the long term, what should I buy?” This is a question I have often received from many students.
In fact, the most challenging aspect of long-term investments is not how to start correctly, but how to properly complete the long-term investment process. Therefore, the priority is not what to buy, but understand the long-term investment process, understand yourself, and make a correct allocation of assets, to complete your long-term investment path.
This article shares three key considerations for long-term investment, including understanding the market, understanding yourself, and understanding the tools and methods, to assess the long-term investment approach that best suits you.
The first key consideration: understanding the market
Understand the main types of core assets in the financial market and choose assets with long-term upward trends.
Important asset categories in the financial market include stocks, bonds, gold, REIT, commodities, etc.
However, not all assets are suitable for long-term investments. Priority should be given to activities with a long-term upward trend.
For most investors, the most basic and important assets are stocks and bonds.
Shares: Shares represent the property of a company. Companies operate to provide products and services and generate profits, and equity investors participate in these gains.
Bonds: Bonds are debt certificates. By lending money to governments or companies through bonds, investors can receive interest and recover capital at maturity.
Since stocks can continuously generate profits and bonds constantly issue interest, stocks and bonds as a whole tend to show a long-term upward trend for longer periods.
In contrast, assets such as commodities and commodities often have higher volatility than the stock market. They generate no profit or interest and lack upward growth characteristics, making them less suitable for long-term investments and more often used for short or swing trading.
2. Different assets have different returns and risk characteristics.
Although companies create profits and bonds pay interest, this does not mean that stocks and bonds rise and never fall. The reason is that at any time, the price people are willing to pay for an asset is influenced by their judgment on the future and current market climate, causing fluctuations. The degree of fluctuation varies between different assets. Bonds are most influenced by the current interest rate environment, so it is not only historical returns that are important, but rather the returns of recent years that are most relevant. Unlike the stock market, the bond market, with the exception of long-term bonds and high-yield bonds with higher volatility, undergoes less drastic short-term changes with medium- and short-term government bonds and investment grade securities. Although overall returns are lower than those of the stock market, stability is relatively higher.
Statistically, even in a 40-year long-term investment in large-cap US securities, there can be drops of as low as -50%. The drawdown scale in the bond market, on average, is lower than that of the stock market.
The need to resist price volatility is a crucial feature of the financial market and something that long-term investors need to understand.
Before undertaking long-term investments, investors should understand the risk characteristics of the assets they invest in, assess the risks they may encounter during their investment, and know which instruments are suitable for them.
The second key consideration: understanding yourself
After understanding the various market activities and their risk-return profiles, the choice of markets in which to invest should be based on their own conditions and risk tolerance.
1. Understand your investment goals
Goals such as accumulating pension funds, saving for future tuition fees for children, or a down payment for a home, may require the sale and withdrawal of funds at certain future points, or may be under pressure not to incur significant losses.
The most common mistake in setting investment targets is looking for high returns, with the belief that the higher the return, the better.
In investment, the potential for high returns is accompanied by high risks, which could also result in low returns or losses. Understanding your goals and how much risk you can tolerate is critical to determining the right allocation of long-term investment assets for you.
2. How long can you invest?
An investment principle is to use only the excess money, as the investment plan must be interrupted when the funds are needed for other purposes.
The shorter the investment period, the lower the risk of the investment. The longer the investment period, the more you can choose higher risk investments.
Generally, if the investment horizon is less than 5 years, it is not advisable to choose high-risk investments. While bearing a lower risk may result in lower returns, the potential loss will also be smaller if the result is not as expected.
Conversely, if the investment period is longer, for example more than 15 years, and you are willing to take a higher risk, you can choose higher risk investments. Over a longer period, there is a greater likelihood of achieving returns close to historical averages.
3. How much risk volatility can you tolerate?
Everyone’s ability to tolerate risk varies due to personal cash flow, age and personality.
In investment, the highest-risk asset classes include stocks, which historically, in some of the worst periods, have declined to -50%. For example, an investment of $1 million could fall to $500,000, or from $20 million to $10 million. Although it may resurrect later, the reality is that many people cannot endure such a process.
Once price volatility exceeds your tolerance, it often means the end of your investment plan, making any long-term investment strategy meaningless.
Therefore, it is important to understand risk tolerance and control risk within your capacity when investing.
4. How much time do I have to do investment research?
Investors with ample time for research can use completely different methods than timeless ones.
Those who have the time and research capacity could adopt active investment strategies; in case of lack of time for research, it could be considered a passive or indexed investment, or entrust the transaction to a fund manager.
The third key consideration: understanding investment tools and methods
1. Deciding on the Proportions of Asset Allocation
Asset allocation is a method of controlling investment risk by distributing funds proportionally across assets.
The objective of asset allocation is to reduce overall asset risk and increase investment certainty through low or sometimes negative correlation between different assets. The allocation method varies depending on the investment period and risk tolerance.
For example, stocks are more volatile, while bonds are less volatile. Therefore, you can use a combination of these two types of assets, such as a typical share percentage of 60% and bonds of 40%. Compared to investing exclusively on the stock exchange, this may result in slightly lower long-term returns, but volatility will be very low and the potential drawdown in a single year may also be lower.
2. Decide on investment goals: beginners should use widely diversified investment tools
There are many different investment instruments in the financial field, such as stocks, bonds, mutual funds, ETFs, etc.
Beginners are advised to start with diversified fund instruments, including mutual funds and indexed funds. Even with a small amount of capital, it is possible to achieve broad diversification, avoiding serious losses due to misjudgment in a single security or bond.
3. Choosing the investment methods
There are many ways to decide the timing of purchases for long-term investments, but the most challenging aspect for beginners is disciplined adherence to the plan.
For beginners, the simplest method is regular fixed amount investment.
As long as the chosen assets have a long-term upward trend, regular fixed capital investments can mediate the purchase price over time. While not always buying at the lowest price, it also avoids buying at the most, helping investors invest with discipline.
Start investing in the long term with simple execution and diversification of risk!
The most challenging part of long-term investment is not how to select goals, but how to execute a long-term investment plan with discipline.
Before undertaking a long-term investment, it is essential to fully understand the market, particularly stocks and bonds, and their long-term characteristics and risks, so that you can anticipate fluctuations that may occur during the investment process.
It is also essential to have a good understanding of yourself before investing in the long term, including your investment horizon and risk tolerance, to avoid making decisions that exceed your risk capacity in pursuing returns.
Once you understand the market and yourself, choose the appropriate asset allocation tools and decide the investment proportion for assets such as stocks and bonds. Beginners are advised to start with tools that offer wide diversification and regular fixed amount investments. Many fund instruments currently provide the effects of diversified investments and regular fixed-amount investments.
After gaining some investment experience, if you have your own opinions, you can allocate a portion of your funds to supplement and strengthen certain types of goals.
