Whenever I speak to people about returns on the various investments in the market, I usually get feedback about how “small” the return is. And to be honest, it does feel that way when you look at returns in the short-term. Everybody knows about the importance of having a long-term focus and the impact that compounding can have on your investment, but investing for the long-term is very difficult. In this post I will explain why long-term investing is difficult and how to do it anyway. 

The obvious problem is that people (especially young people) do not have enough money to keep cash stashed away for a rainy day, much less to keep funds away for 20 years in order that they may generate a significant return. When you’ve got to pay rent two years in advance, provide for yourself and your family, settle a car loan, pay for a wedding or pay for graduate school, investing can seem like the least important thing.

Another difficulty with long-term investing is the lack of trust in financial institutions. Financial liberalization in Ghana is only about three decades old but the horror stories of investors that have lost all their savings are many. This unstable environment makes people feel that their funds cannot be safe in any kind of financial institution.

Another reason why long-term investing is hard is the volatility of returns. As I revealed in a previous post, the 2010s was a poor decade for the GSE. Anecdotal evidence suggests that there were several withdrawals from equity funds from investors not because they needed the money but primarily because the fund was performing poorly.

The final reason why investing long-term is difficult is the desire for instant gratification. This does not require any detailed explanation. It is natural for humans to want to get all the things they want immediately instead of saving up their money. Adding to this is the pressure to maintain a certain social status which may make you spend more freely than you need to.

Overcoming the barriers to long-term investing starts with taking away control of some spending decisions from your hands. That is why public pension schemes are so indispensable for most people, it’s because they deduct the contribution before you can get a hold of it. The certainty of a lump sum (no matter how inadequate) followed by monthly pension payments when you retire is a big source of security. The best thing you can do right now is to sign up to a pension scheme if you are not already signed up.

The next thing to do is to develop a habit of making small contributions to a well-financed and transparent pension fund or mutual fund. Mutual funds, for example, allow contributions as low as GH₵20/month. By setting up a standing order to make the monthly contributions, you will eventually get used to the deductions and hardly think of it. Do not think that a small contribution might as well be no contribution at all.

Also, know that unnecessary withdrawals from an investment really hurts returns. It is not a good idea to withdraw your money when a fund is doing poorly and go back to put it in when the fund is doing well. That is selling low and buying high. Spend time to research the funds you want to invest in and the assets they hold, make your investment and give it time to run.

While it is true that the record of financial institutions in the country is not great, there are several examples of safe investments. The government has issued several fixed income instruments which are available through banks, brokers or indirectly through mutual and pension funds. There are also listed stocks available through brokerages or mutual and pension funds if you want to own them indirectly. One should not be in despair about the financial system when so many options exist.

The benefits of long-term investing are more than worth overcoming the difficulties for. It is a great way to prepare for when you can no longer work or to give your family a cushion when you are no longer here. It is difficult, yes, but it must be done.