Article written by Mark Donnell, Portfolio Manager
Lighthouse Funds

Successful long-term investing is as much about managing emotions as it is about managing finance.

Equity funds tend to achieve their returns in waves. They have upswings and downswings, but over the long-term equity markets have a strong track record of positive returns. We liken it to the waves on a beach with an incoming tide – over time each successive wave inches further and further up the beach – in between those crests the water level falls back but over time the tide does rise up the beach.

Meanwhile, human nature is that we want to back winners and run from losers. So human nature is that investors tend to invest in an equity fund when it’s just had a strong upswing wave.  A fund that has just posted huge gains and outperformed its peers looks like an obvious buy. And human nature is that investors often withdraw their money from an equity fund at the bottom of downswing. A fund that has just declined, or underperformed, looks like it should be abandoned. Presumably those investors then re-invest the money they’ve withdrawn into the next fund that’s just had a strong upswing. And rinse and repeat.

But history shows that sort of “invest in what’s working lately” strategy isn’t generally a reliable path to long-term investing success. This year’s winners can often be next year’s losers. Frequently buying and selling investments in response to short-term market movements can increase costs, lead to less disciplined investment decisions and increase the risk of poor long-term investment outcomes.

Instead, if you are going to consider performance when assessing your choice of investment fund, focus on its average return over at least a 5-year timeframe rather than its most recent returns. Every fund will have good periods where it outperforms its long-run average, and also some periods where it underperforms it – there is a lot of dispersion in the short-term returns. While past performance doesn’t guarantee a certain outcome going forward, looking at a longer track record can provide a more balanced view of how a fund has delivered outcomes across different market environments.

Then, once you’ve invested, be patient. Resist the temptation to run at the first sign of a downturn.

The quality of your fund choice doesn’t matter if you don’t have the stomach to stay the course and stop acting emotionally. Volatility is the price that you pay for equity investing’s higher long-run returns. The market doesn’t reward you for acting in comfortable ways – it rewards those who can endure a bit of discomfort.

If you’d like to learn more about the Lighthouse Global Equity Fund, please refer to the Product Disclosure Statement and other disclosure material available on Lighthouse Funds Avenue landing page on InvestNow.

Disclaimer:

The content provided here is written by us, Lighthouse Funds, as general information that we trust is helpful and informative. It’s based on information that we believe to be accurate and reliable, although we can’t guarantee that this is the case. It isn’t intended to be personalised advice for any investor, or class advice for any group of investors. We recommend that before entering into any investment you first seek advice from a financial advisor who can give you professional advice that takes into account your objectives, needs, financial situation and circumstances. Please see our disclaimer. * The issuer and manager of the Lighthouse Global Equity Fund is FundRock NZ Limited. A Product Disclosure Statement is available at https://investnow.co.nz/fund-manager/lighthouse-funds/.

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