Discipline, Courage Spell Success In Long-Term Investing

By Bob Caplan and Peter LaBella

Long-term investing is not an art or science. Long-term investing is an endurance test! Smart investors know that long-term returns are determined by the time in the market, not the timing of the market. Staying the course of long-term investing, in the wake of losses and volatility, requires discipline and courage.

This year, most stock portfolios have followed the downward trend of the Standard & Poor’s 500 and the Dow Jones and Nasdaq indexes. As a result, staying committed to stocks has been difficult for even the most experienced investors.

Many less-experienced investors have become accustomed to the bull market — buying stocks on market dips and then waiting for the stock value to rise along with the market. These investors have not experienced the challenges of a bear market, where predicting the bottom is impossible.

History confirms that down years for the market are par for the course. That is why stocks are great savings vehicles for long-term investors. They provide superior long-term returns due to their high short-term risk.

The key to being a successful investor is building a diversified portfolio, rather than relying on market timing to build your portfolio. In time, a consistent long-term investment strategy will bring greater returns.

From January 1980 through November 2000, the S&P 500 posted an amazing annualized return of 16.4 percent. This two-decade period of extraordinary wealth creation helped produce an average annual return of 10.4 percent in the 20th century.

In order to create a long-term plan, investors need to have realistic expectations of what the stock market can accomplish with their money. Two key investment decisions must first be made.

First, what percentage of the total portfolio can be committed to long-term stock investments? Money that will be needed in six months to remodel the house or in two years to pay for a child’s tuition should be allocated to lower-risk, fixed income securities or money-market funds. A general guideline is that money not needed for five years or longer should be allocated to long-term investments.

Be careful not to be overly aggressive in an effort to make up for lost time or lack of previous saving. Determine your short-term and long-term needs and then use the proper investment vehicle for your goals.

The second decision in equity investing is sector selection. Since predicting what will be the next hot growth sector is next to impossible, diversification is paramount. Investors who were invested solely in technology and communications stocks this year can testify that a portfolio with a narrow focus can reduce returns and increases volatility.

A good mix of stock positions in all sectors may under-perform specialized portfolios during short periods of time. However, spreading the risk across a diverse selection of stocks will provide safety and performance.

In summary, set realistic targets for your investments, short and long-term. History is a great indicator. Use the appropriate investment vehicle for differing short and long-term goals. Remain diversified and invested. Most importantly, do not focus on short-term market swings created by market and world turmoil.

Bob Caplan and Peter LaBella are financial advisors with FMA Advisory Inc., 1631 N. Front St., Harrisburg.