Investment time horizon is a critical concept in building wealth. During periods of volatility and uncertainly, one of the biggest challenges for investors is sticking to their long-term plan. Every up and down swing creates strong emotional reactions and second guessing. Most investors have very long investment time horizons, typically decades or more. Investment managers also require long time horizons to deliver on their investment thesis.
There are floods of COVID-19 market commentaries on how the virus and government responses will impact the economy and the market. For long-term investors, it’s hard to know what to make of them all. Taking a deep breath and stepping back by reframing with a longer term perspective can help investors avoid costly mistakes. Every decade has its challenges, but even with a myriad of setbacks, the average decade-return over the period below was 204%, so tune out the noise and stick to your plan
It’s only natural for someone invested in a poorly performing active equity mutual fund to wonder if it’s time to make a change. Should an investor sell a fund if it trails its benchmark for a year? Three years? Five years?
Now, more than ever, planning is a powerful tool to help investors succeed and achieve better outcomes. The table below highlights the benefits of planning taken from a study on retirement planning among Americans over age 50, over a wide range of market conditions. The results show that having and sticking to a plan results in three times the net worth when compared to those who don’t have a plan.
One of the underappreciated aspects of active management is the ability to build a well-curated portfolio of mutual funds that pursue unique investment strategies. The chart below shows the aggregate performance of ten active US equity strategies over the last thirty-eight years. Allocating to the top strategies and avoiding the bottom strategies can dramatically improve long-term performance.
Even though we all know market fluctuations are a normal part of equity investing, large market declines can be scary because they often happen rapidly and feel random.