A colleague raised an interesting question recently: how should we invest when our long term isn’t as extensive as it once was?
I had to chuckle because investing for the “long term” is sometimes used as a way to try to mitigate the damage from investments that go wrong in the short term! And if we are in the autumn of our years, that option can lose some of its power.
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But after my initial giggle, I sat bolt upright as if poleaxed. And that was because of the sudden realisation that my 60th is but a couple of birthdays away. My colleague was talking about people just like me!
Let me say first, though, I reckon a long-term investment horizon remains a good strategy. But that’s only the case when picking good-quality businesses that are growing, and buying stocks when they have a fair valuation. The strategy isn’t at fault, but my ability to use it is diminishing over time.
Shorter-term investment strategies
Thankfully, long-term investing isn’t the only strategy that can be successful in the stock market. Many stocks can show decent advances over just several months or a few years.
For example, an early investor in an emerging growth company can earn rapid gains. It’s true that operational progress can take time to fully mature — perhaps years. But early signs of growth in revenue and earnings can put smaller companies on more investors’ radars. And one of the great drivers of a stock’s gains can be a valuation rerating, as a growth story becomes more widely known in the investment community.
When that happens, a stock can move higher within a short time frame. Indeed, a valuation of 10 times earnings can increase to, say, 30 times earnings in just months rather than years. But that doesn’t always happen.
Another potentially shorter-term strategy is to trade stalwart stocks on the grounds of valuation. And Peter Lynch did a lot of that when he managed Fidelity’s Magellan fund in the US. So, here in the UK, I could focus on stocks in the FTSE 100 index or the FTSE 250. The idea would be to buy them when a stock’s valuation cycles lower and sell when it cycles higher again. In his books, Lynch talks of achieving shorter-term gains of between about 20% and 50% with that strategy. But there’s no certainty that I could replicate his success.
Thorough research remains key
Short-term strategies like those two ideas still require thorough research before buying. I’d want to make sure I was dealing with solid businesses that aren’t suffering any major operational challenges. But even then, nothing is guaranteed, and I could still lose money on shares even if they get past my scrutiny.
But for a shorter-term strategy, I’d also consider selling shares to stop a loss before it goes too far. After all, I won’t have enough time to be underwater with investments for 15 years or more. In that approach, I’d be in good company because successful investor Lord John Lee reckons he uses a stop-loss tactic as well.
And at 60 and beyond, I’d aim to balance shorter-term strategies with a cash-in-hand approach to investing. And to achieve that, I’d invest in dividend-paying stocks, chosen carefully.