Trying to understand financial markets by tracking the daily media headlines (Brexit, Trump, China etc) can become a distraction for those who want to build long-term investment solutions. We have recently compiled a Short Guide to Successful Investing.
A Guide to Successful Investing: Step 1
Understand How Markets Work
Over the long-term, which we define as over 10 years, the two most important factors that drive investment returns are:
1. The increase in long-term dividends,
2. Earnings growth of companies that make up the market.
How much people are willing to pay for those earnings and dividends will change constantly. In the short-term, this will lead to speculation and sometimes wild gyrations in the value of the stock market. Even in the medium-term, the long-term average market performance is made up of many periods of that are decidedly below average. We are often asked why the stock market increases over time.
Investors should plan for frustrating periods, volatility, uneven results, and even a stock market crash. Over time though, investors will continue to value the stock market based on the income they receive (dividends) and capital appreciation (fuelled by earnings growth). Successful investors know how the stock market works and are prepared to “stay the course” and continue to invest to reap the long-term financial rewards. See the cumulative return figures below over the 10 year, 20 year and 30 year period as evidence of the rewards, which successful investors, pay attention to:
The over-riding lesson here is that successful investing involves learning to deal with your emotions and being aware of behavioural biases. Try to remember that today’s media headlines are unlikely to have any significant bearing on the long term value of your investment. Successful investing is about time in the market and emotional intelligence to ‘stick with it’. Start with a strong market related philosophy and understand the drivers of return over the long term.
Have a Very Happy Weekend.
We will follow up with Step 2 in the near future.
As always do not hesitate to contact Infinity Financial Planning with any questions or queries that you may have by emailing firstname.lastname@example.org
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