10 February 2022

Smart Investments: Long-Term Thinking

"The basics of investing: where, when, how much, and whether to hold out for a miracle", Oleg Shibanov, Director of SKOLKOVO-NES Centre for Research in Financial Technologies and Digital Economy.
Smart Investments: Long-Term Thinking
Content source: SKOLKOVO School of Management

When do you think the markets will pull back? Where should you invest now?

In a widely diversified portfolio of assets – only this route allows you to sleep relatively peacefully. If you are a qualified investor who believes in a particular asset class, try betting on it and see how many times it outperforms the market in five years. According to Dalbar reports, the average investor performs worse than a balanced portfolio of stocks and bonds, as he often switches from one asset to another and loses in terms of returns.

Even if the FRS and the ECB raise their rates in 2022, this is unlikely to significantly reduce the value of risky assets.

An effective minimum amount to invest?

Any amount, really. Modern investment formats, including ETFs and exchange-traded mutual funds, allow you to invest a minimum of 1,000 RUB in diversified portfolios. True, it is worth keeping an eye on the trading and management costs, as they can be significant for small amounts. It is therefore usually recommended to start with 1 million RUB.

What is the optimal ratio of a 10-year portfolio (stocks, ETFs, bonds, etc.)?

There is no overall recipe. It all depends on your attitude towards risk. If an investor is afraid of fluctuations in the value of a position, it may be more profitable for him to remain in deposits or bonds: this way is easier on the nervous system. And the other investor is ready for risk and can invest everything in stocks.

Average your position or forget the miracle and close with a loss?

I would not recommend averaging. Losing assets are sometimes worth getting rid of sooner rather than later. This is due to the cognitive scheme of investors called the disposition effect. The average market participant often holds on to losing stocks for too long and tends to get rid of winning ones (“locking in profits”) too early.

Is an investment loan any good?

I strongly advise against buying using borrowed funds. For the private investor, this often turns out to be a one-way ticket to bankruptcy.

How do you avoid mistakes when investing, where do you look, what do you need to analyse?

In some respects, the main thing is to understand yourself. The main philosophy in investment is that a person starts by understanding what risk he is ready to take, and then selects a portfolio for that size of risk. So, you can start with any general investment textbook, such as Mebane Faber's Global Asset Allocation.

How do you make a long-term portfolio covering 20-30 years?

Start from what readiness for fluctuations in the investment values is acceptable. Over a 20+ year horizon, stocks could be about as risky as bonds but still offer a higher average return. It is therefore probably advisable at such a time to consider “Buffett's advice”: to invest the bulk of the portfolio, up to 90%, in a widely diversified stock portfolio and replenish it every quarter. The remaining 10% can be held in liquid bonds or on deposits.

What percentage of returns are "successful" when investing?

The US stock market, one of the most successful in terms of profitability, brought in, in annual terms for the period 1927-2020, a yield of about 9% in dollars. So, even before accounting for inflation, this is not an off-the-scale figure. Long-term regular investments can raise substantial funds for retirement or large projects, but don't expect a portfolio to double in value every couple of years. On the other hand, if you see promises of returns “from 20%”, it is worth considering how much risk there is attached to such offers.

How do you generate a passive income of 100,000 per month starting with 1 million?

Not technically possible. That would mean you are looking to get a return on investment of more than 100% per year (100,000 per month times 12 months divided by 1 million capital). Such returns, even when they do occur, cannot be sustainable for a significant amount of time. An annual return of 7-9% in dollars in the future will most likely be quite a good result, and this means that it takes about 15 million of capital to generate passive income of 1.2 million roubles per year.


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