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Tata Capital > Blog > Wealth Services > How can a long-term investment approach help manage a crisis?

Wealth Services

How can a long-term investment approach help manage a crisis?

How can a long-term investment approach help manage a crisis?

From the year 1990 when the benchmark Sensex was trading at less than 1,000 points, to the year 2020 when Sensex crossed 40,000 mark for the first time, India has witnessed multiple economic downturns. But if these numbers tell us one thing, it is that being invested for the long-haul more than pays off.

The Indian stock market along with other global equity indices are now on a recovery path. Although the Covid-19 infections are on the rise, Dalal Street may soon be able to gain the pre-Covid levels. The 2008 financial crises had also taken the sheen off the markets but a recovery soon followed and the trust in the financial markets was restored.

Historic evidence suggests that long-term investment could be among the best means to survive a crisis. Therefore, astute investors are known for buying and holding stocks rather than trying to time their investment.

What is the buy and hold strategy?

Anxiety may lead you to buy and sell very frequently. Volatile markets are difficult to handle. Frequent buying and selling may result in wrong bets. Besides, when you over trade, your trading commission cuts into your returns.

Although buy and hold is no guarantee that you would end up with higher returns, it is more likely that you will get rewarded for taking a higher degree of risk and remaining invested in the highs and lows of the markets.

Riding the highs and lows

Another set of numbers further corroborate that long-term investment helps manage highs and lows. According to Investopedia, an analysis of  stock market returns since the 1920s shows that individuals have never lost money investing in the S&P 500 for a 20-year time period.

Needless to say markets have proven to be the first victims of crises such as the setbacks of the scale and size of the Great Depression, Black Monday, the tech bubble and the financial crises, but long-term investment have aided investors to balance such setbacks.

Retail investors are poor market timers

The last few months can accurately describe why it is a futile exercise to time markets. Most investors tend to withdraw money at the slightest hint of a loss and then end up failing to reap benefits when markets rebound.

Investors who tend to pay too much attention to the market movement tend to miss the long term benefits of staying invested in the markets. A simple long-term buy-and-hold strategy has worked more often than not.

Additional Read: Why has the number of retail investors increased during an economic crisis?

Diversification with long-term investments

Planning your investment for the long run is the key to surviving a crisis. Investing in international equity is one way of doing it as it helps in diversifying your portfolio. Such a strategy opens up opportunities to invest in companies dealing in technology & healthcare.

Investing in US equities and technology-oriented funds can help you reap benefits from depreciating rupee value.

Experts continue to advise having a long term view to effectively deal with crises. However, it is important to continue to reassess one’s risk-taking capabilities. Changing circumstances require investors to reassess their portfolio. Similar to crises seen in the last decade, markets are likely to emerge strong from COVID-19 too. Diversification and regular assessment over a long period of time will aid in going through these tough times.

Additional Read: Benefit of Asset Allocation in the Portfolio

Perks of long-term investment

In essence, a long term view helps accumulate more wealth as it mitigates the risk of high volatility. Compounded growth in mutual funds, fixed deposit or other instruments maximizes profit in the long term. Therefore, PPF and EPF have proved to be the most popular investments, especially suited for investors looking to avoid risk.

Conclusion

The ongoing financial upheaval may require you to change your investment strategy. Rebalancing your portfolio for long-term investment may now seem more reasonable than ever. With Tata Capital’s Wealth Management solutions, you receive the best portfolio guidance for the current economic climate. For those who are seeking the best suggestion to organize their finances during the ongoing pandemic, Tata Capital Wealth offers solutions that can aid you in planning your SIP mutual fund investments and other wealth creation products that help you maximize your earnings.

Build Your Wealth with Expert Guidance from Tata Capital!

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