Why in Long-Term Investing, You Need a Proper Strategy?

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Long-Term Investment.

A long-term investment is an important aspect of wealth creation and financial planning. It is a way to build a sustainable financial future by investing in various asset classes like stocks, bonds, mutual funds, real estate, and others.

When we talk about Long Term the following supporting statements are pitched:

1. Buy & Hold
2. Fill it & Forget it
3. Only those who forget after buying make money.

Buy and hold doesn’t mean buy and forget. Also, long-term investing is not buying forever. Buy and Hold doesn’t mean Buy and Hold it till the world’s end. Nothing is forever.

Nokia, Kodak, Lehman Brothers etc are the best examples.

While you’re buying, buy with a 10-year view. Sell if fundamentals change and rebuy it when fundamentals reverse in favour. I believe that never churn unnecessarily. Remember, fortunes are made only over the long term. In the long term, the possibility of making a loss is 0% in absolute terms.

Do you know the real reason behind the 0% loss?

Let us take an example, we bought 1 kg of Potato in 2000 and sold it in 2022 do you know the price for buying and selling? In 2000 Potato price was 3.20 On Dec 25th 2022, the Potato price on BigBasket was Rs 52.04. it’s Compounding 13.53%.

Whenever inflation increases, the price of everything rises. This leads to an increase in EPS, hence the stock prices.

As far as inflation is concerned the average rate of inflation for the last 22 years in India is nearly 7%. If your investment grows below or equal to 7%, you are not earning any real returns. These Returns are an impact of inflation.

What is a Real Return?

Real Return= Absolute Return – Inflation

We are talking about the same thing when comparing FD with MF schemes. If your returns aren’t beating inflation, you’re losing your wealth instead of growing it.

Let us check how?

If your portfolio’s value is not growing in line with inflation, the real value of your investments will decrease over time.

Let us check 10-year data from Nifty50 and average inflation from 23/03/2010 to 23/03/2020.

On 23/03/2010 Nifty50 was 5225.30.

On 23/03/2020 Nifty50 was 7610.25.

If we calculate the return for it, the absolute return goes to 46% and CAGR return to 3.83.

Inflation during this period was 6.92% (In CAGR).

Now apply the Real Return formula Real Return = 3.83 (Nifty50 Return) – 6.92 (Inflation) = -3.09

Let us elaborate on this.

The initial Inflation Index was 148 in March 2010 which increased to 289 in March 2020.

Now if you want to keep your purchasing power the same your portfolio value should also grow at the same rate:

The inflated portfolio value should be 5225.3*331/148 = 10203.46

but it was grown to only 7610.25.

Though we have earned 3.83% returns in Nifty50, our actual returns are -ve. In real terms, our wealth is declined by 3.03%.

Let us check this with SIP.

There are two major factors responsible for this situation in the above example.

1. Volatility – May reduce the Returns of your Portfolio.
2. Inflation – Reduces Real Returns of your Portfolio by reducing Purchasing Power of the accumulated Value.

There are many other factors also which affect your portfolio’s returns.

That is why a Proper Strategy is Needed For Long-Term Investing.

Here are some reasons why a proper strategy is necessary for long-term investing:

1. Clarity of goals: Long-term investing requires clarity of goals to achieve the desired outcome. A proper strategy helps investors define their investment objectives, time horizon, and risk tolerance, which helps in selecting the right investment products.
   
2. Diversification: A proper strategy includes diversification, which is the practice of investing in a variety of assets to reduce risk. Diversification helps investors spread risk across multiple investments, which can help to mitigate the impact of market volatility.
   
3. Consistency: Long-term investing requires consistency to achieve the desired results. A proper strategy helps investors stick to their investment plan even during times of market turbulence. Consistency helps investors avoid making impulsive decisions, which can harm their portfolios.
   
4. Time in the market: Long-term investing requires time to benefit from the Real Power of Compounding. A proper strategy helps investors identify their investment time horizon and select investments that align with their investment goals.
   
5. Risk management: A proper strategy includes risk management, which helps investors manage the risks associated with investing. A proper strategy includes assessing risks, setting risk limits, and using risk management tools like stop-loss orders to limit potential losses.

Conclusion:

In conclusion, the proper strategy is essential for long-term investment because it helps you manage market volatility, align your investments with Financial Goals, manage risks, minimize taxes, avoid emotional decisions and maintain consistency. Creating a well-thought-out strategy can increase your chances of success in your long-term investment endeavors.