Monday, March 21, 2016

How To Become A Prudent, Long Term Investor

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So many of the problems that we see in the financial system come from the fact that there are a lot of players looking to make a quick buck. It means that short-term price swings can be great, and the panics even greater. In fact, now that computers have taken over much of the second-by-second trading, common sense has gone out of the window.

That's why more and more people are turning their attention to long-term investments. They want to make decisions based on fundamentals, not on whether a computer algorithm says buy or sell.

The movement into long term investment as a strategy is motivated by the fact that most people don't actually want to play the stock market. It's just that, thanks to low-interest rates, they have to. So, with that said, what are the best long-term investors doing?

Keeping An Open Mind

Though it may seem like the safe option to always invest in the S&P 500, it might not be. The problem facing long term investors right now are the systemic risks to the global economy. There is the depressed Chinese growth rate, the low price of oil and the never ending debt mountain in Western countries. That means that the risks aren't isolated to individual sectors but apply across the board.

If the economy does start to sink, it will take all of the big companies down with it, at least temporarily. That's why long-term investors are always on the bleeding edge of research. They want to find hidden trends in the data. They want to know what consumer will demand in the future. And they want to infer what that will mean for the price of stocks and shares.

Thanks to the drive and ambition of smaller companies their stocks tend to outperform those of the larger firms over the long term. Larger firms are often at the edge of what they can achieve using legacy business models. But smaller companies can only compete by disrupting industries dominated by larger firms and moving to a new paradigm. In the process, they tend to make greater strides in earnings and productivity.

Change Your Perspective

Investors face the constant temptation of short-term profits at the expense of long-term gain. They will shirk land package investment opportunities, for example, and short stocks instead.

But that tradeoff should be avoided for those who aren't professional traders. Short term trading requires skills that most people do not have. Nor do they have time to spend on developing those skills.

Yes, the rewards of short-term trading seem to be great. But, like any financial incentive, there is a mixture of risk and reward.

Ignore The Fluctuations

Markets are inherently volatile. Day-to-day the price of your equities and assets will go up and down. Ignore it. What you care about as a long term investor, is what those assets will cost to buy when you eventually come to sell. If you see house prices dipping next year, but only want to sell your assets in ten years, don't sweat it.

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