Long-term investment is a time-tested strategy with positive results, but market volatility can leave investors questioning their methods. With the arrival of vaccines increasingly likely and Brexit uncertainty finally ending, some financial experts believe the FTSE 100 is at the start of a rocketing road to recovery. If true, this spells great news for patient investors riding out the storm of 2020.
Avoiding risk with long-term investment
Companies like Cineworld, Rolls-Royce and IAG have seen their businesses decimated by Covid-19 and their share prices collapse. But positive vaccine news has these shares rising with a vengeance.
While market volatility can create opportunities for trading shares, it brings additional risk. Many companies with a poor outlook are seeing their shares traded up and down daily because it makes traders and institutional investors a lot of money. But it can create a false sense of optimism, and retail investors are left high and dry when the companies come crashing back down.
That’s one reason long-term investing is a better alternative to opportunistic day trading. While it may seem like investors miss out on big upswings, they also avoid the massive drops. History has shown that long-term holders achieve better returns than day traders. Therefore, it’s good to keep in mind that patience pays off.
Many long-term holders who saw their portfolios crumble in the March market crash have now recovered all their losses. This shows that the ability to remain patient and invest in strong companies pays off.
Buy like Buffett
Long-term investment is a strategy advocated by Billionaire investors Warren Buffett and Charlie Munger. They encourage investors to research and understand the companies they’re interested in buying. This ensures an investor’s decision to buy shares is backed with self-assured knowledge.
They also encourage buying when the share price is lower than its intrinsic value. This means it’s priced at a point that looks undervalued to its sector and future potential. The ultimate aim is to hold the company’s shares for many years. Long-term investment allows the buyer to benefit from the power of compound interest. So if the company looks to have a competitive advantage and staying power, it could very well be a good addition to a long-term investment portfolio.
Why will the FTSE 100 rally?
Brexit has been dragging on for four long years. To finally put it behind us, no matter what the terms, will allow the economy to look forward. It leaves the country in a position to reset and rebuild. If sterling becomes weaker in the process, then it attracts foreign money into the economy, in turn boosting the FTSE 100.
The sheer amount of cash held by fund managers and many retail investors could be another reason for a rally. Cash held by fund managers is high, because the 2020 volatility and overhanging uncertainty caused prudence to prevail. But it doesn’t look good for them to horde cash for any length of time. Therefore, pressure is on to invest again. The same goes for retail investors. While they don’t feel the same pressure to get back to investing, temptation may return once Covid vaccines are in widespread use and the economy reopens.
I think there’s a good chance 2021 will see a Footsie rally, and it pays to consider long-term investment in equities.
