Generally, there are no hard and fast rules when it comes to investing. Some investors may study the most complex and deepest theories to gain insights into market trends, and seek potential opportunities for greater returns. Others could keep faith with a number of fundamental investing principles and strategies to help them achieve their investment goals.

Physicist Albert Einstein reportedly said, “compound interest is the eighth wonder of the world.” Probably, Einstein knew investors cannot beat time, and that compound interest has the potential to become an advantage.

Indeed, long-term investing could be relatively straightforward and one could work towards achieving better outcomes by optimising these three ‘dos’:

1. Do harness the power of time

It is important to start saving and investing early to optimise the benefits of compounding. For example, if an investor had invested US$100 in the MSCI World Index in 1970, the return on price alone would have grown to more than US$2,600 as of end-December 2020, with an annualised return of 6.7%¹.

If the investor had reinvested the dividends, the long-term returns brought about by the compounding effect will be more significant. Regardless of whether dividends are reinvested¹ in cash or stocks, they can provide more than the price returns. As of end-December 2020, the US$100 investment has currently grown to more than US$6,900 and over US$11,600, with annualised returns of 8.7% and 9.8%¹, respectively. Therefore, start investing early and let time do the work.

MSCI World Index: Performance based on different scenarios¹

1. Source: FactSet, MSCI, J.P. Morgan Asset Management.
*Reinvestment in cash based on the same month US three-month Treasury bill (secondary market) yield. Indices do not include fees or operating expenses and are not available for actual investment. Past performance is not a reliable indicator of current and future results. Data reflect most recently available as of 31.12.2020.

2. Do invest regularly

Over the past two decades, the world has experienced geopolitical turmoil, recessions and a public health crisis that have led to various market ups and downs. Such market volatility could likely persist as the investment environment continues to evolve.

Still, some investors could become vulnerable to short-term volatility by surrendering to their heightened emotions and make ill-timed investment decisions. Others could try to capture the potential opportunity to ‘buy low’ and ‘sell high’ in volatile markets. Many random factors could affect the investment environment and it can be tough to accurately time a market entry or exit.

Moreover, the more frequently investors enter and exit the market and the longer they wait-and-see, the more out-of-market-risk may result. Even if the market is favourable, they could lose potential returns with this approach. And the potential compound losses from the failure to maintain sustained investment could be even greater. Instead of trying to time the market, we believe it's more important to keep investing.

3. Do diversify

No single asset class can be an all-time winner. Investing all funds on a single or a small number of assets, especially assets with relatively poor liquidity, could increase concentration risk. It is important to keep in mind that different assets have different characteristics. Taking equities and sovereign bonds as examples, the correlation between the two types of assets has been low previously, and even had a negative correlation². Additionally, diversified investment in multiple assets with different characteristics could help increase return potential in the long-term while managing risks.

The correlation coefficient between stocks and sovereign bonds²

2. Source: Bloomberg Finance L.P., FactSet, MSCI, J.P. Morgan Asset Management, Standard & Poor’s.
*Rolling six-month pairwise correlations between weekly returns in equity (S&P 500 and MSCI All Country World Index price indices) and bond (Bloomberg Barclays US Aggregate Government Treasury and Bloomberg Barclays Global Aggregate Government Treasuries price indices) markets. Past performance is not a reliable indicator of current and future results. Data reflect most recently available as of 31.12.2020.

From 2010 to 2020, cash returns had been sluggish. Investing in developed market equities alone will deliver relatively high returns, but also relatively high volatility. For a diversified investment portfolio, an investor can achieve an annualised return of 6.4%, with annualised volatility at a moderate level of 9.1%, much lower than the 14.1%³ of developed market equities.

Could investors on their own create a diversified portfolio that may incur higher transaction costs and build the expertise to manage a range of asset classes? This could be complicated but they can instead optimise mutual funds and other investment tools.

Through active investing, fund managers could employ different investment strategies to add various types of assets across sectors, markets and regions in a portfolio, optimising the benefit of diversification.

3. Source: Bloomberg Finance L.P., Dow Jones, FactSet, J.P. Morgan Economic Research, MSCI, J.P. Morgan Asset Management. Developed Market Equities is represented by the MSCI World Index. The “Diversified” portfolio assumes the following weights: 20% in the MSCI World Index (DM Equities), 20% in the MSCI AC Asia Pacific ex-Japan (APAC ex-JP), 5% in the MSCI EM ex-Asia (EM ex-Asia), 10% in the J.P. Morgan EMBIG Index (EMD), 10% in the Bloomberg Barclays Aggregate (Global Bonds), 10% in the Bloomberg Barclays Global Corporate High Yield Index (Global Corporate High Yield), 15% in J.P. Morgan Asia Credit Index (Asian Bonds), 5% in Bloomberg Barclays U.S. Aggregate Credit – Corporate Investment Grade Index (US IG) and 5% in Bloomberg Barclays US Treasury – Bills (1-3 months) (Cash). Diversified portfolio assumes annual rebalancing. All data represent total return in US dollar terms for the stated period. 10-year total return data is used to calculate annualised returns and 10-year price return data is used to calculate annualised volatility and reflects the period 31.12.2010 – 31.12.2020. Indices do not include fees or operating expenses and are not available for actual investment. Past performance is not a reliable indicator of current and future results. Data reflect most recently available as of 31.12.2020.

Conclusion
 

Long-term investing could be a relatively simple and straightforward process when investors can optimise compound interest, diversify across asset classes of relatively lower correlation and keep investing continuously.

In a digital age, investors could also leverage online tools provided by fund management companies to regularly review their investment portfolios conveniently and seek professional advice based on their investment objectives and risk appetite.

J.P. Morgan Asset Management is among the supporting organisations of Hong Kong Money Month. This is a month-long campaign on financial planning and money management. Find out more.

Provided for information only based on market conditions as of date of publication, not to be construed as investment recommendation or advice.

Diversification does not guarantee investment return and does not eliminate the risk of loss.

Investment involves risk. Not all investments are suitable for all investors. Past performance is not a reliable indicator of current or future results. Please refer to the offering document(s) for details, including the risk factors. Investors should consult professional advice before investing. Investments are not similar to or comparable with fixed deposits. The opinions and views expressed here are as of the date of this publication, which are subject to change and are not to be taken as or construed as investment advice. Estimates, assumptions and projections are provided for information only and may or may not come to pass. This document has not been reviewed by the SFC. Issued by JPMorgan Funds (Asia) Limited.