Good things come to those who wait. This old proverb which originated from a poem by Lady Mary Montgomerie Currie (1843-1905) means that people who are patient are typically rewarded by achieving their goals. Although the poet’s advice was not intended for investors, investing over the long term based on fundamentals reaps far more lasting rewards than speculative short-term trading.
What are Long-Term Investments?
For our purposes, long-term investments are illiquid, income-generating assets that are intended to be held for three years or longer. They come in a variety of asset classes including private equity, private debt, real estate, and many others. Although their book value may be subject to mark-to-market adjustments from time to time, their real value tends to be immune from temporary market fluctuations, leading to meaningful wealth creation in the long term.
Benefits of Long-Term Investments
Investments should not be done on a whim. Investments based on long-term convictions offer many rewards.
Offsetting Market Volatility
Market drops are stressful events that often trigger an instinctive reaction to sell the investments. But holding your investments during difficult times can reap considerable reward when markets bounce back.
Consider Black Monday, when the Dow Jones Industrial Average lost more than 22% of its value on 19 October 1987. Most investors panicked and sold their investments, and realized the losses immediately. Those who didn’t panic, and stayed invested in large-cap stocks, got returns of 16.6% in 1988 and 31.7% in 1989.
The Art of Compounding Returns
Compounding returns are like a snowball rolling down a hill, steadily growing as it gathers more snow. Year on year, reinvesting the returns on your investment grows your wealth. The longer your investment strategy, the more you benefit from compounding returns.
No Specific Skill is Required
Long-term investing does not require extraordinary trading skills or financial savvy. You just need patience and a strategy to make the most of your returns.
Removing Emotions from the Equation
Listen to your head, not your heart. Instead of aborting investments at the slightest market sneeze, assess the situation to prevent irrational decisions.
The Family Office adopts the Endowment Model as a long-term strategy to grow and preserve the wealth of more than 200 clients base across the Gulf Cooperation Council. Schedule a call with our financial advisors and start building your investment strategy.
Types of Long-Term Investments
Due to their illiquid nature, alternative investments require a long-term commitment to reap the benefits of the illiquidity premium. Alternative investments cover a broad range of assets classes (excluding liquid ones like stocks, bonds and cash). They include precious metals, collectibles (art, wine, antiques, coins, or stamps) and financial assets such as real estate, commodities, private equity, distressed securities, hedge funds, exchange funds, carbon credits, venture capital, film production, financial derivatives, and cryptocurrencies. The Family Office focuses on tangible alternative asset classes that can preserve and grow your wealth.
Private equity includes companies or business ventures that do not trade on stock exchanges, like the Nasdaq or New York Stock Exchange. Unlike publicly traded stocks, private equity investments are not regulated and are best suited to knowledgeable, experienced investors. Returns are usually made when the private equity investment is exited through a sale or IPO. Adding private equity to your portfolio can offer above-average returns.
The real estate market is vast and varied. It encompasses four broad categories: residential real estate, commercial real estate, industrial real estate and land. Each broad category is further subdivided into subcategories. Commercial real estate, for example, covers any property used for business purposes, such as offices, retail shopping centers, hospitals, hotels, etc. Fundamentals vary greatly by sector, subsector and location. Long-term investors may capitalize on certain themes. For example, due to the high cost of owning a home, millennials are forsaking home ownership in favor of renting. Investors can capitalize on this trend by investing in apartment complexes in cities with younger emerging professionals.
Private debt, or private credit, is an investment in the debt rather than the equity of privately held companies. Most commonly, it involves non-bank entities making loans to private companies or buying such loans on the secondary. Debt is generally less risky than equity because debt service has priority over dividends. Debt returns are also generally lower than equity returns. However, when banks have to restrict their lending due to more stringent capital and liquidity requirements, attractive opportunities arise in the private debt space.
The average investor may be wary of investing in emerging markets due to the lack of familiarity with local risks and regulations. Foreign businesses in prosperous economies and growing sectors can be a great opportunity with the right investment manager.
Patient investors who are willing to invest long term in alternative asset classes can reap better rewards, especially with compounding returns. The right wealth manager can help you set an investment strategy that meets your long-term while navigating the risks across market cycles to preserve and grow your wealth.
The Family Office provides world-class, thoroughly-vetted, long-term investment opportunities in alternatives. We favor the Endowment Model of investing to build diversified portfolios that balance risk to generate the desired returns. Schedule a call with one of our financial advisers to learn about the investment solution that suits your exact needs.