Think long term for better results

Have you ever realised that the acts of investing money often tend to go beyond the realm of reason and logic? Many a time investors either get blown away by emotional overtones, get carried away by a wave of varying opinions (read rumours), become over-exuberant when markets go up, or on top of it, get swayed by fears when markets dive to news depths.

In any case, they end up making a raft of bad investment decisions that run contrary to what is actually needed and, obviously, stand to lose their money. Dabbling with your hard-earned money to get 'greater' investment returns may not yield the desired outcomes as you expect, say experts.

The long and short of it is – it is easy to invest money, but what is not is getting the best returns on investment. So what lies behind a good investment strategy?

Judgement sans emotions

Making a right investment decisions always may not be possible. However, one can at least avoid making too many bad decisions, for instance in stock markets, by not letting emotions besiege the investment decision, say experts. "Don't be motivated by greed or fear. Greed causes people to buy into overheated markets, and fear causes them to cash out at exactly the wrong time," says Steve Gregory, Managing Partner, Holborn Assets, Dubai.

Another point to remember is that the past performance is not necessarily a good guide to future performance.

"Last year's winners [markets] are less likely to be this year's winners, too. If Russian funds gave a 200 per cent return in the last 12 months, they are not likely to do the same this year," he says.

If you are risk averse, avoid all investments that involve gearing – borrowing to invest, he says.

Gearing carries high risks of losing all your money when markets fall. If you never gear and only take mainstream mutual funds you will never lose all your money, though markets can and do go down as well as up, adds Gregory.

Another significant fact is the time that the investment is held for. "The biggest problem arises when people take out their money as soon as they see the market going down and they book losses. If they take a long-term view and ignore the ripples of volatility in the markets, then their investment will come back and produce gains," says Darren Ashley, Managing Director, Candour Consultancy, Dubai.

Again, they forget that the stock market is a long-term investment. Sometimes investors panic when there is a downturn in the market and react in a knee-jerk way by liquidating their position to try and prevent further losses, thereby consolidating the losses they temporarily face rather than staying invested during the bear run to take advantage of potential upturn in the market. This investment mistake applies to anything regardless of the type of the investment, whether stocks, commodities, property, etc, he adds.

Having a reasonably diversified investment portfolio is another significant point to remember when it comes to investing, say experts.

Don't just hold on to one asset class but diversify across different asset classes. For instance, when investing in equities, don't just invest in one company or sector, says Ashley. "When you purchase a global fund, the fund will hold stocks on many of the global stock markets, and therefore, you have diversified into investments, which are bought and sold in many currencies. A regional fund, like Latin America, for instance, will be investing in assets bought and sold in currencies of Latin American countries, and a single country fund like Russia will invest in one currency only. Holding a variety of currencies spreads risk. Holding a number of sectors and industries further spreads risk. Mutual funds enable you to do this," says Gregory.

For most people, a mix of mutual funds, which includes funds appropriate to their views on risk and volatility will be the best solution. Most insurance companies and many other investment houses offer their own range of funds, which are managed by professional investment teams and manage and spread risk across the markets in which you might invest, he adds.

Avoid myopic view

Patience is a great virtue, and when it comes to investing, patience can turn out to be rewarding, as well. So, to be a smarter investor, do not to try and make short-term gains, say experts.

"You will nearly always do better if you hold onto your investment long-term," says Ashley. In case of property market, for instance, it often pays to have a long-term investment horizon than trying for short term gains fed by speculations, say experts. "An important point is to have a long-term view on the property market than a short-term view because the profit you make in the short term would be eaten up by the cost of buying and selling the property," says Ashley. He says one of the mistakes people make is to look at property as a sole retirement solution.

They consider property as a form of disposable asset that could be sold off, or rented out, after they retire from work in order to support their livelihood. However, if the property market is bearish when they retire, with the value of property having dipped significantly, it's going to be very difficult for people to generate the retirement income they were looking for, he says. For instance, take the current property downturn. Now it is very difficult to find a buyer or tenant for a property. In this case if one is holding property as a retirement support solution it is very difficult to get either a sustained rental income or sell off the property.

Property is not a liquid asset

The key point is while property is an excellent asset to hold, it is also essential to diversify your investment in other assets such as bonds and equities – and not concentrate only on property. This will ensure that you can have something to fall back upon during times of property downturn and when you need money. Property is not a liquid asset and it's very difficult to get rid of it when market conditions are adverse, he adds.

Property is about location, location, location. There is always a thriving location somewhere in the world. There is always a good story about property wherever it is situated, says Gregory.

However, he adds, remember that most property purchases need financing, and if buyers cannot get financing they will not be able to buy. This means if you are a cash buyer, you may need to find a cash buyer when you want to sell. If you borrow to buy, you risk more than you realise. It is possible to pay all your savings into a property, as a deposit and costs, then see the property lose value. In such cases you can sell at a loss and still owe the bank money. This means your entire savings were lost and you still owe the bank money. There has never been a property market where this experience was not suffered by thousands or even millions of buyers at some point in time. Even established markets like the UK have experienced periods of negative equity, and recovery from that position can take ten years or more.

"Always invest for the longer term when considering property purchase. In the long term, property rental income plus capital growth in the value should outperform most other forms of investment except equities," he says.

The art of investing

- Avoid being overwhelmed by fear or greed while investing

- Past performance of an asset may not be an indicator of future

- Try to have a long-term investment perspective

- Spread risks across different assets, but don't over-diversify

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