A Long-Term Goal Needs More Than an Equity Investment
One of the most common conversations I have with investors goes something like this:
“I have a long-term goal, so I’m investing in equity mutual funds. That should be enough, right?”
My answer is mostly “Not necessarily!”
Equity can be a very important part of a long-term investment strategy. But when we talk about long-term investing, we often focus so much on where to invest that we overlook a more important question: Will you be able to stay invested when things don’t go as planned?
The test of a long-term investor is what they do when they have lost 15% or 20% and every financial headline seems to be telling you that things could get worse.
This is where human behaviour play an important role.
When markets have done well recently, we tend to believe they will continue doing well. When markets have fallen sharply, we become convinced that the fall will continue. This is recency bias, giving too much importance to what has happened lately when making decisions about the future.
This recency bias can lead to a familiar cycle of markets
The problem is that, in most of the cases, when the market has changed, the financial goals have not changed.
This is why I believe a good financial plan is much more than an investment recommendation. A financial plan should tell you why you are investing, how much risk you need to take, how much you can afford to take, and what you should do when markets become uncomfortable.
If you know that your retirement is 20 years away, you have sufficient liquidity for your near-term needs, and your portfolio has been structured accordingly, a market correction becomes something you have to navigate and not necessarily something you have to react to.
Of course, a financial plan should be reviewed when your circumstances change. But it shouldn’t be rewritten every time the market changes.
So, when someone tells you, “You have a long-term goal, just invest in equity,” remember that equity is only one part of the answer. The bigger question is whether your investment strategy is based on your goals, risk profile and life circumstances.
Shreedhara is the Founder & Director of Ara Financial Services Pvt. Ltd. He has an experience of over 2 decades in Financial Service Industry with majority of it in guiding individuals and institutions on their investments requirements.
