January.3.12Personal Finance
think long
Money Matters with Nimi
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A year ago, Bolade’s investment in a stock mutual fund was valued at N1,200,000. Today it has lost more than half of its value and is worth only N580,000. She is devastated and fearful that the situation may get even worse. The money was put aside specifically to pay for her master’s degree beginning in September 2009. Her dilemma is, should she go ahead and cash out of this faltering investment and place the funds in a short term money market account? Or should she leave the money where it is, with the hope that the market will correct itself by August when she must pay her school fees?

The hard truth is that Bolade’s money should never have been invested in the stock market in the first place, but should have been saved in money market instruments. Unless she has an alternative source of funds, Bolade may have to sell enough of her stock investments to pay her school fees or may be forced to defer her place. As anyone who has invested in stocks has experienced, when you do not have time on your side, stockmarket investing comes with significant risk.

What does long term really mean?

One of the best pieces of investment advice ever given by financial advisors, is to look at investing as a long term activity both in bear markets, when prices are falling as well as in bull markets where stock prices are going up. Yet people in the financial world are often accused of never really clarifying exactly what “long term” means except to say that cash required for immediate needs should not be invested in the stock market. Beyond that, a long investment horizon could mean three to five years, and much longer.

Don’t Panic

Most of us continue to look back on the last three years months as some of the most difficult of our investing lives. Many panicked and bailed out of poorly performing investments and crystallized their losses as they did so as they let go of assets many of them have already recovered. Don’t let your emotions get the better of you and derail your overall investment plan. By sticking with your long-term investment strategy during a bear market you are putting yourself in the best position to profit in a bull market when the market begins to turnaround.

Spread your risk, be diversified.

Whether you have invested for the short term or the long term, make sure you have managed your risk with a diversified, well-balanced portfolio. Most investments do not reach their full potential for several years. Usually, within that length of time, long-term investors, especially those who invest in a diversified portfolio, can ride out market volatility without dramatically affecting their ability to reach their goals. It is important to seek financial advice so that a financial plan can be designed to achieve your unique financial goals.

Keep Investing

No one can tell for how long this financial crisis will last, but over the long term, we can expect the global economy and markets to recover. The recovery could be within the next year or two or could be further away. But the biggest mistake you can make right now is to stop investing for your long term goals. If you are paralysed with fear and stop investing, or move all your funds into the money-market, it will be harder for your portfolio to recover when the markets rally. For those who have come out of the past few months with some excess cash, start to put it to use and start to pick up some “bargains”; the stock market remains one of your best investment options.

Stocks are ideal long-term investments; very few people have made enduring fortunes overnight in the stock market; those that have truly built wealth in the markets have been patient and have had a long term view. It’s rather like in Aesop’s Fable, “The Tortoise and the Hare”; the moral of the story is “slow and steady wins the race”.

History is the best teacher; though you won’t be able to avoid temporary losses during a downturn, the long term has been much kinder to investments. Don’t let your patience run out or your emotions get the better of you. Stay the course, take advantage of new opportunities and think long term.

 

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