Invest Your Money With Long Term Perspective

GUEST ARTICLE: Listen to the financial pundits or BBQ banter and you would be forgiven for thinking we were caught mid-chapter of Chicken Little.

Doomsayers are publicising their scary visions for the global economic future and lay people are confused and made fearful by the Nostradamus-like vague prophecies of complete financial meltdown.

What is most bemusing is the strength of resolve for those who “predicted” (and don’t they all) the demise of the markets.

Say it will rain often enough and one day you be will right – this makes you no more a weather man than a statistical advocate as every day it doesn’t rain brings you statistically closer to the day it does. These commentators now appear as all-knowing gurus and while exposing the problem – have not provided a solution.

This ambiguity has enhanced the true disease of finance, Fear. The more we compound the fear the faster we compound decay.

Getting caught in the hype surrounding the “Crisis” or “Melt down” (or whatever sensationalist garbage anyone wants to label this economic period) has been a catalyst and our markets are short term mirrors of this sentiment with daily movements like these:

Day Market Consensus & Movement
Monday World going to end, markets -7%
Tuesday Miracle cure found, markets +5%
Wednesday May be wrong about cure, markets -3%
Thursday Right about cure, wrong about problem, Markets +2.5%

Something is missing from all of this sentiment … Logic.

Long term, our market is based on principles of Capitalism.

The purpose of business/capitalism is to generate profit and true investment is not about the gamble of outperforming asset classes in the short term (as expressed by the financially misguided investors/advisers who chase short term glory) but in acquiring more assets in volatile times.

Witnessing a 20 or 30% fall in the value of your investment is not easy but focusing on the ownership of more assets is the true and correct fundamental of wealth creation.

The maxim prior history is no indicator of future performance is true with one exception – as long as the fundamentals of capitalism exist, the market will come back to its previous high point and beyond. A broad index recovers lost value and beyond over time

Compounding wealth creation occurs when more of these assets are acquired as they become cheaper in value such as at present in November 2008 when the ASX has dropped 50%. This is a mathematical science with no speculation in sight.

You only need to look at the journey of the market since the “Crisis” or “Melt Downs” in ’87, ’91, Tech Wreck, 911 to now to know that the sky doesn’t fall and a logical approach that ignores fear is the best way to challenge the prophecies of the Doomsayers.

“If you can keep your head while all about you are losing theirs, yours is the world and everything in it.” Rudyard Kipling, If

James Mousa

This guest article was written by James Mousa, a Financial Planner with BDO Kendalls Financial Planning in Cairns, Queensland.

Through his workshops James talks candidly about investment risks and costs, using his understanding of investor psychology and market forces as well as the factors that motivate investment decisions to advise clients on how to invest prudently with a long-term perspective.

If you’re a blogger or an expert about a topic I cover on this blog I encourage you to contact me and I’ll consider publishing your guest article here including generous attribution and back links back to your website as thanks for your contribution

8 thoughts on “Invest Your Money With Long Term Perspective”

  1. Thank you! Thank you! Thank you! Some one has some sanity remaining. One of the reasons I started my blog was to help counter this follow the news crazyness.

    Thanks,
    Bill

  2. Nice article.

    All thats happening at the moment is that within business there is a process which i like to call ‘Sorting the Men out from the Boys’

    The business’s in a strong financial position and decent cashflow will tough it through, but they light at the other end of the tunnel will definately be brighter than before, as there is likely to be alot less competition.

    I know a couple of people that have recently gone self employed or started up a business and are doing really well.

  3. Hi James, good article.
    I always feel that most investors act in the short term perspective, and not the long run. As you wrote, the sky doesn’t fall and a logical approach is to act when the market is down.
    the Doomsayers regulaty come up when the market is down. And of course the market is going better after some time.

  4. An interesting article, certainly the topic on everyone’s minds. I agree with the comment that this is a short term correction that is required once every so many years for the markets to resolve themselves. However, the only worrying factor that scares me is that the fundamentals of the markets that you refer to are not as strong as they need to be.

    See the whole boom has been running on borrowed money, which you may also term as fundamentals, but now the credit has started drying up, what does one do? The worst thing is that throwing more borrowed money (government bail out packages) will not necessarily resolve the problem, since its been credit that has the problem in the first place… Welcome your thoughts on this. Some institutions should have been allowed to collapse to flush out the toxicity from the markets instead of giving them more borrowed money.

  5. It definitely seems like the world is in a Catch 22, spend more money or stop spending completely, I think that the system we have today cannot survive and somehow a new system based on solid fundamentals will have to emerge if we are to prosper in the future..

  6. This is actually a great time to buy, but sadly most people have their money also tied up in bad investments that are not possible to liquidate without taking a loss at the moment. Those who have cash are king these days.

  7. With the focus of fund managers, company reports (and increasingly superannuation funds) on quarterly performance it is refreshing to see someone writing about long term investing. Gone are the days where the CEO has been there for a long time (I think most contract now are like 3 years – how can you honestly run a company for a long run when your contract is only 3 years??).

  8. There is a sad truth in modern life. Young folks today aren’t usually taught skills involving money other than how to waste it. That’s so sad. Here we live in the age of Capitalism and people aren’t taught in detail what money really is and why it’s so powerful. Why is that so?

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