Long Term Investing Does Not Mean Holding On To The Same Investments

 Long Term Investing Does Not Mean Holding On To The Same Investments

An investors asked us how we could promote long term investing on one hand and recommend changing funds every year. Should he not hold on to the funds he bought for 4-5 years to get optimal returns? Isn’t that what long term investing is?

This question is at the heart of what any portfolio manager does so we thought we would explain how the two are related.

We believe that investors must invest for the long term  to benefit from investing in stocks or equity mutual funds. However  long-term is not the only criteria for getting returns. The quality of the chosen investment matters even more. A poorly performing mutual fund (or stock) would not give you good returns, how much ever long you hold it.

Not all equity mutual funds are created the same and, more important, do not stay the same over time.

There is a wide difference in their performance and while the good ones should be held for long, the ones that don’t perform need to be quickly replaced. The key, therefore, is to separate the idea of investing in the category of “Equity Mutual Funds” from specific “Fund” or “Scheme”. What financial experts recommend is that you:

1. invest for the long term in equity mutual funds
2. monitor your investments, and periodically weed out relative non-performers.
3. Don’t get attached to any individual fund or scheme.

By investing for the long term we mean that , when you sell those mutual funds, you MUST reinvest the sale proceeds back into another (better) mutual fund.

This is the power of the longterm approach. You stay invested in Equity Mutual Funds for the long term but you periodically change the schemes you are investing in depending on their performance.

Let me explain this with an example:

– We started 2012 with 4 funds in equity mutual fund
– At the start of 2013 the portfolio manager replaced one of the funds in its basket,
– You had invested Rs 20,000 on Jan 2, 2012 and did not invest any money thereafter
– The portfolio manager prompted you on January 1, 2013 to switch to the new fund

Here’s what your holdings would look like at different points in time – depending on whether you continued to hold on to the old fund or if you chose to rebalance and switch to the new fund.

Please note that the total amount remains invested in equity funds – which is your objective. But dropping an existing investment in favour of one that has better prospects based on a scientific analysis, turns out to be a better decision.

Selecting which schemes to invest in, monitoring their performance. reviewing them and switching is all part of a disciplined investing process.

This sounds like a lot of work

And that’s because it really is. Which is why very few investors are able to follow this discipline even though every financial expert recommends it. Those that follow it taste success.

Happy Investing

Source:Scripbox