Long Term Investing
Is There a Better Way?
Four Pillars to Rapid Wealth Generation
Book Recommendation
From the Financial Glossary
Quote from the Wise

Investors, especially those who have a full-time profession other than investing, are often advised to invest for the long-term. The general recommendation follows this pattern:

• Get money cut from your paycheck
• Invest it directly into your 401(k) account or other retirement vehicle
• Make sure you have some index funds or growth mutual funds in that vehicle
• Let it accumulate and watch the action.

Cannot fault that approach too much except for the 25-30 years it would take for something to come out of it. And that is the long term investing most advisors want you to take.

What is long term investing supposed to buy you? It is supposed to help by:

1. Reducing Risk
2. Allowing compounding to work for you

Now, compounding will work for you irrespective of your actual investment, so long as your investments are growing. And if your rate of return is high, you do not need a very long time horizon.

Reduction of risk with investment time horizon is indicated generally because it gives your investments time to work out of rough patches and tough spots. No single investment style ever remains favored in the markets forever - they come and go. If you have invested with a particular mutual fund - you will suffer the same problem. The fund (assuming it is a well run, well managed fund) will go through ups and downs and you will need to give it time to fully recover and provide you long-term returns that are at or better than market.

Is There a Better Way?

In order to allow you to participate in the various phases of a market cycle, another common recommendation is to:

• Invest in the Total Stock Market Index Fund, or
• Purchase shares in multiple mutual funds to provide investment-style diversification.

This will help to a certain degree, with the main limitation being once again, that of time.

A much better way is to purchase individual stocks, or go with an investment manager of a mutual fund who has a methodology that echoes the following line of thinking:

• Investment Style is geared towards making large sums of money from any given investment
• Understands the fundamental forces that are carrying the market and the economy
• Understands the forces propelling a stock forward
• Pays attention to market validation of his or her thinking (uses technical analysis)
• Has an investment style that is not wedded to a particular type of investing (value, growth, dividend) but is instead focused on picking out stocks with the potential for doubling/trebling and more of your portfolio.
• Investment time horizon in and of itself is of no value to him or her, but growth of the stock value is.

The Good Fund Manager

The solid fund managers do not often request you to hold their funds for 20 years to see results - they offer a 3-5 year time horizon. Most investors know that it does not take more than that time period for an investment to work out - and if it is taking longer than that, they have probably misread the situation. The good fund manager often knows about a poor decision long before that 3-5 year period. In fact, most bull runs are over in that time-frame, as are most cyclical bear markets.

So if you are sitting on a fund that even after 3-5 years since you invested is still underperforming, you have a good reason to remove it from your portfolio (there are always exceptions, but the odds favor a poor fund manager running the show).

Four Pillars to Rapid Wealth Generation

The Investment Pillar

Every time you invest - whether it is with stocks, or with mutual funds, always keep two things in mind:

1. The amount of capital you plan to allocate to that particular investment vehicle
2. The time period for which you plan to keep that investment

If instead, you follow a "fire and forget" approach, then you are leaving your portfolio development to chance rather than a plan. Remember that a given bull market - whether it is for a stock, a mutual fund, an investing style, or a commodity - generally does not last more than 2-3 years at any given time. So not knowing how much to invest and for how long to invest is a folly committed time and again by non-professional investors.

Avoid this problem and always have a plan for your money in each of your investment vehicle. Always answer:

• How much to put in this vehicle &
• For how long to hold this vehicle

This will give you a good sense for whether your plan is working out or not, and when to bail and when to hold.

Book Recommendation

From the Financial Glossary

From Barron's Financial Dictionary:
Head and Shoulders: Patterns resembling the head and shoulders outline of a person, which is used to chart stock price trends.

Simplified Meaning: Head and Shoulders is a term from technical stock analysis. You can see this as a price high, followed by a dip in prices (left shoulder). Then a new high in prices is formed, followed by another dip (the head). Finally another high is made, but not higher than the head - this is followed by another dip (right shoulder). This entire set-up is called head and shoulder. See an example here. This is generally a bearish signal.

Quote from the Wise

Wide diversification is only required when you do not know what you are doing. -- Warren Buffett

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