Investments are frequently framed as a long term option for your finances. So why is that important? Why should you be looking at longer time horizons?
Whenever you read anything about investments, people often detail how the events they are highlighting should play out in the financial markets over certain time frames. In introducing those differing horizons, which are always ranges rather than a specific period, it provides the caveat that some developments could take longer to play out than initially anticipated. It indicates that while markets can follow historical trends, they don’t ‘copy’ them and sometimes deviate completely from a previously trodden path. And sometimes, anticipated events can take place months or even years later than originally foreseen.
This is one of the reasons that we at 7IM constantly reference that what we do requires a long term view of the world. And, by that, we are thinking about a future that’s at least five years away, although we really prefer a timeline that’s nearer a decade.
We are also conscious that long term means different things to different people. It can often, for example, depend on your age group – those who are retired naturally have a longer time frame of experience to put events into context, but probably a shorter time than those pre-retirement to enjoy them!
People should therefore think through their own time horizons. Deciding what you want to achieve and by when in terms of broad timelines should be done before committing money to the market – and even to us – although, of course, we’re very happy to help guide those discussions!
But why is a long term view so important? We highlight three key reasons here:
Investment risk considerations
One of the main principles behind a solid investment approach – and particularly of importance to 7IM clients – is that investors can benefit from their investments across an entire economic cycle. Markets don’t always go up, but a broadly diversified portfolio should help grow your wealth and protect it from some of the bumps along the way. And, as markets don’t follow predictable paths, your portfolio has to hold that breadth of investments all the time. So you should spend the time in the market for your portfolio to benefit from all of your investments – that’s not a short term option.
It’s a well-known statistic among investors that your money, if it’s invested and achieves an annualised 7% per annum, should double every 10 years. And while we know that investments can go down as well as up, the more decades you can ‘give’ your money, the better. But it’s not just about the returns themselves compounding i.e. the investment gains you’ve earned on your original investment generating their own additional gains. If you invested £100 60 years ago in the FTSE 100, you would have made £77,040. However, if you reinvested the gross income from all dividend income over that same period, then you could now be sitting on £1,068,087 – quite the difference!
With the Bank of Mum and Dad now calculated to be the ninth largest mortgage lender, and with tax allowances and pension legislation constantly changing, more families are realising that there’s a lot more complexity around planning your finances than ever before. I often have to remind myself that if I’m planning to invest, it’s important to invest in planning. There are a number of benefits to dealing with financial affairs as a family, and (if you want) that can easily be facilitated by a professional adviser. It means that you all could benefit from every single one of the many possible allowances despite some of those requiring a minimum seven year timeline to become effectual.
Hopefully these thoughts will help you realise the many benefits of being invested for the long haul, while you manage the various shorter term considerations too. We are very conscious that things happen in life that can’t always be planned for, but we try to help here too. So if you’re investing in an ISA or a SIPP via 7IM, we can help you ‘allocate’ your investments into separate ‘buckets’. This means that your money may be structured to try to help you meet any more medium term financial needs and those longer term aspirations in the most tax efficient way possible.
Justin Urquhart Stewart
Co Founder and Head of Corporate Development
Seven Investment Management LLP is authorised and regulated by the Financial Conduct Authority. Member of the London Stock Exchange. Registered office: 55 Bishopsgate, London EC2N 3AS. Registered in England and Wales No. OC378740.
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