Opportunities and risks in long-term investment: CIFR

Australians who take a long-term approach to their investment strategies can take advantage of opportunities arising from the actions of short-term investors, but it is not without risk, new research claims.

The Centre for International Finance and Regulation (CIFR) conducted three research papers investigating issues surrounding long-term investment, following claims that Australian investors were excessively focused on short-term opportunities.

The research, led by CIFR research director, Geoff Warren, was divided into three papers covering what determines and investment horizon; the benefits and pitfalls of long-term investing; and how to design an investment organisation to successfully pursue investing for the long-term.

The first paper argued that long-term investors have discretion over when they trade and that they make decisions with their sights set on the long-term.

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While the second paper noted that investors who take a long-term approach have three advantages over those who adopt a short-term methodology to their investments, with the removal of time pressure from the decision-making process.

"Long-term investors can focus on if rather than when a particular investment return will actually be achieved," Warren said.

"This allows them to pursue investments that may be avoided by those with shorter horizons who are primarily concerned with getting a return as soon as possible.

"The second advantage of long-term investing relates to the ability to exploit opportunities arising from the actions of short-term investors. These could include mis-pricings that arise from the activities of short-term investors, or premiums associated with short-term risks."

Long-term investors also have great latitude to invest in unlisted and illiquid assets, opening their portfolios up to sectors and strategies that may not be readily available in listed markets that short-term investors cannot normally access.

However, Warren warned that while there were advantages to adopting a long-term approach, there were also risks.

"Notwithstanding its advantages, there are several pitfalls associated with long-term investing," he said.

"Arguably, the biggest dangers relate to incorrect expectations about what the long-term holds. The distant future is hard to predict; and investing based on a false premise can lead to money being lodged in an investment that underperforms for an extended period before the error is recognised."