Taking a long-term approach to investing

Patience may be a virtue, but when it comes to building your portfolio it’s also an excellent investment strategy. A long-term investment perspective requires a well thought out plan of action plus the discipline to stay with the plan. In return, long-term investing offers distinct safety advantages. Here’s why.

Patience may be a virtue, but when it comes to building your portfolio it’s also an excellent investment strategy. A long-term investment perspective requires a well thought out plan of action plus the discipline to stay with the plan. In return, long-term investing offers distinct safety advantages.  Here’s why.

Long-term investing tends to focus on quality investments that demonstrate a lengthy and solid financial track record featuring most of the following characteristics.

n Consistent dividend payout;

n Strong balance sheet with low debt to equity ratio;

n Steady revenue and earnings growth;

n Steady stock price appreciation; and

n Focused management track record measured by solid annual return on equity.

While past performance can’t predict future return, these quality investments are usually market leaders in their industry and widely traded. They are well followed by research analysts as well as the business media, and the value of their products or services is usually straightforward to understand and assess. The value of these quality investments isn’t measured overnight, but over time.

The long-term investor will be looking for a diversity of investment opportunities that, taken together, will offer a combination of growth and security. This naturally promotes asset diversification among different investment classes — equities, fixed income and cash equivalents. It also promotes diversity within each investment class.

Diversity spreads risk within the portfolio and limits the potential for loss from any one investment by a substantial margin.

Diversity over the long term also means investors can seek out undervalued investments or growth opportunities that will be risk balanced by the strength of their core portfolio holdings.

The long-term investor avoids speculation on “hot tips” and trying to beat or time the market. A fully invested portfolio that is focused on long-term performance often saves investors from “taking a flyer” that could have major consequences Speculation usually means lost time and money for most investors. A portfolio diminished by a series of speculative investments may never fully recover its asset value and reduce the portfolio’s long-term return on investment.

You’re taking advantage of the “miracle of compound interest”.

A number of financial trends works in investors’ favour when they take a long-term perspective. Compound interest is chief among them. An investor who builds a portfolio over time through a regular investment plan of contributions and reinvested dividends and capital gains (especially in the tax-deferred environment of the RRSP) can dramatically increase a portfolio’s investment value. The longer it’s allowed to work, the higher the return. For example, a $25,000 initial investment supplemented with $5,000 each year and compounding at an average 6.5 per cent annual return will be worth $65,000 after five years, $119,000 after 10 years and $434,000 after 25 years of compounded growth. A long-term investment plan that involves regular contributions takes full advantage of compounding and enables you to make money on the money you’re saving for retirement.

Strange as it may seem, the longer you remain invested in the market, the less risk you may face as an investor. In Canada, the S&P/TSX 300 has experienced its share of short-term volatility but for long-term investors, the average 40-year annual rate of return has been 10.9 per cent.

Investors with a short-term horizon who move in and out of the market are subject to the full forces of daily, monthly and yearly market volatility. Investors with a 10-year or more investment time frame can expect the periodic fluctuations in their portfolio’s value will be smoothed out and the long-term upward momentum of the market will play a more dominant role in determining their investment returns.

Short-term investors must micromanage their portfolios, usually in an attempt to market time their buying and selling in an effort to beat the market. A long-term perspective on portfolio management means not worrying about investment performance on a daily basis. The investments you’ve assembled in your portfolio are subject to review (quarterly or annually) to ensure they are performing according to plan and generating an overall return on invested capital that is what you expect. When necessary, buying and selling to re-balancing the portfolio and asset allocation decisions can be done methodically and not reactively or in haste.

The advantage of a long-term investment approach comes from the knowledge that time is on your side and working for you.

 

 

Judy Poole is a financial advisor with Raymond James, and has spent the last 39 years involved in the financial industry. You can reach her at judy.poole@raymondjames.ca. This article is provided as a general source of information and should not be considered personal investment advice.  The views expressed are those of the author and not necessarily those of Raymond James Ltd.    Securities offered through Raymond James Ltd., member – Canadian Investor Protection Fund. Financial planning and insurance offered through Raymond James Financial Planning Ltd., not a member – Canadian Investor Protection Fund.

 

 

Just Posted

The Pierre family, an Indigenous family, once lived in what is now downtown Summerland. Today, Pierre Drive is named in honour of the family. (Photo courtesy of the Summerland Museum)
Pierre family played role in Summerland’s history

Downtown Summerland was once Penticton Indian Reserve #3

This parking on the east side of Martin Street will be removed permanently Monday morning (June 21, 2021) to put in the Lake to Lake bike lane. (City of Penticton)
Parking removed permanently to make way for bike lane in downtown Penticton

Work begins Monday morning to replace parking spots with bike lane on Martin Street

Jaimee Peters photo of a Willow Midwives helping with a birth. Willow closed its doors March 31 because of a shortage of midwives. (Contributed)
South Okanagan’s only midwifery to re-open this summer

Willow Community Midwives was forced to close because of a shortage of midwives

Gord Portman getting ready for the Father’s Day dunk tank fundraiser for Discovery House. So far Portman has raised $3,000. (Facebook)
Penticton man takes the plunge for recovery house that helped save his life

Gord Portman said Discovery House and Pathways have been everything in his 1 year sobriety

(File photo)
Supreme Court Justice rules Bay has to pay Penticton’s Cherry Lane mall

The ruling found that there had been no unavoidable delay preventing the Bay from paying their rent

Marco Mendicino, Minister of Immigration, Refugees and Citizenship during a press conference in Ottawa on Thursday, May 13, 2021. THE CANADIAN PRESS/Sean Kilpatrick
Canada to welcome 45,000 refugees this year, says immigration minister

Canada plans to increase persons admitted from 23,500 to 45,000 and expedite permanent residency applications

FILE – Most lanes remain closed at the Peace Arch border crossing into the U.S. from Canada, where the shared border has been closed for nonessential travel in an effort to prevent the spread of the coronavirus, Thursday, May 7, 2020, in Blaine, Wash. The restrictions at the border took effect March 21, while allowing trade and other travel deemed essential to continue. (AP Photo/Elaine Thompson)
Feds to issue update on border measures for fully vaccinated Canadians, permanent residents

Border with U.S. to remain closed to most until at least July 21

A portion of the George Road wildfire burns near Lytton, B.C. in this Friday, June 18, 2021 handout photo. THE CANADIAN PRESS/HO, BC Wildfire Service *MANDATORY CREDIT*
Blaze near Lytton spread across steep terrain, says BC Wildfire Service

Fire began Wednesday and is suspected to be human-caused, but remains under investigation

Blair Lebsack, owner of RGE RD restaurant, poses for a portrait in the dining room, in Edmonton, Friday, June 18, 2021. Canadian restaurants are having to find ways to deal with the rising cost of food. THE CANADIAN PRESS/Jason Franson
Canadian restaurateurs grapple with rising food costs, menu prices expected to rise

Restaurants are a low margin industry, so there’s not a lot of room to work in additional costs

RCMP crest. (Black Press Media files)
Fort St. John man arrested after allegedly inviting sexual touching from children

Two children reported the incident to a trusted adult right away

Barbara Violo, pharmacist and owner of The Junction Chemist Pharmacy, draws up a dose behind vials of both Pfizer-BioNTech and Oxford-AstraZeneca COVID-19 vaccines on the counter, in Toronto, Friday, June 18, 2021. An independent vaccine tracker website founded by a University of Saskatchewan student says just over 20 per cent of eligible Canadians — those 12 years old and above — are now fully vaccinated. THE CANADIAN PRESS/Nathan Denette
At least 20% of eligible Canadians fully vaccinated, 75% with one dose: data

Earlier projections for reopening at this milestone didn’t include Delta variant

Emily Steele holds up a collage of her son, 16-year-old Elijah-Iain Beauregard who was stabbed and killed in June 2019, outside of Kelowna Law Courts on June 18. (Aaron Hemens/Capital News)
Kelowna woman who fatally stabbed Eli Beauregard facing up to 1.5 years of jail time

Her jail sentence would be followed by an additional one to 1.5 years of supervision

Cpl. Scott MacLeod and Police Service Dog Jago. Jago was killed in the line of duty on Thursday, June 17. (RCMP)
Abbotsford police, RCMP grieve 4-year-old service dog killed in line of duty

Jago killed by armed suspect during ‘high-risk’ incident in Alberta

Most Read