Valuation and risk of long-term investments

Three things are important when investing: return, risk and liquidity. Your attention should be focused on evaluation and risk.

If you invest for a long time and you want to draw your money in retirement, for example, liquidity ceases to be essential for you.

Valuation goes hand in hand with risk. Here it is advisable to make a turn. The basic lesson for investors is that the higher the return, the greater the risk. This equals the time you want to invest.

A shorter investment horizon means that the risk will be higher, as the invested funds will have less time to reach or exceed the original value. In contrast, for longer periods of time, the time plays for riskier investments.

The decline at the beginning of the investment cycle may not interest you in a situation where you plan the life of the investment for the next two decades, compared to the five-year horizon.

As the investment horizon lengthens, the risk becomes more acceptable. In short, you have a longer time for the loss to be erased over time and you return to profit. Even with the volume of the investment, the risk does not change in any way. A more important indicator is the goal he wants to achieve when investing.

It does not depend so much on the volume of investment as on the goals. It is therefore necessary to set an appropriate return / risk ratio. Everyone has a little different, said Jan Traxler, CEO of Finez Investment.

Long-term investment goals

When investing for a long time over a period of two or more decades, two goals are offered. The first is to overcome inflation in the long run. The second is to achieve similar returns as competitors. If you are investing in a Company A equity mutual fund, you will be interested in how a similarly focused investment company B fund is doing. If your fund does not generate such returns as the competition, this is a signal to reconsider the entire investment.

Of course, this does not apply in a situation where you measure the performance of the funds on a daily or monthly basis. Even a drop in the fund’s performance or assets on an annual basis does not necessarily mean a bad portfolio manager or a wrong investment policy.

Benchmarking is useful when you are selecting a specific fund. And because no one will guarantee you the future, you have to choose based on history.

Acceptable risk

The risk of long-term investments is reduced. Any losses are offset by a longer investment horizon. Long horizons are also suitable for gradually locking in yields and leaving investment positions.

With a long investment horizon, you can afford to go into higher risk. Volatility, ie fluctuations in the value of the investment, will be completely different in the case of a five-year horizon than in the case of several times this period.

Revenues and loss relief

The revenues correspond to this. If you experience a loss during the investment cycle and you cancel your investment without clearing the loss, the return will be lower or non-existent. Unlike a longer investment cycle, the appreciation is determined by the loss relief.

Theoretically, every loss is erased and you realize the return again after some time. It looks good on models. However, the situation is mainly influenced by the fact that investors leave investment positions either prematurely or after a predetermined period without waiting for the growth trend.