An investment is an act of foregoing consumption today in order to allow for better consumption at a future date (Hue et al. 1). A long-term investment refers to investing with the goal of holding an asset for an unspecified period of time by an investor with the capacity to do so (World Economic Forum n.p). Ivashina, Victoria, and Josh further provide a more specific definition of long-term investment where they define long-term investments as; “investing with typical holding periods exceeding five years that, in recent decades, have been typically pursued in private partnerships” (7). Research reveals that long-term investors are among the actors capable of providing public goods worldwide (Harvey 1). Besides, long-term investors are capable of adopting positions where time for payoff is indeterminate, exploit opportunities created by short-term investors’ actions, and are willing to invest in illiquid and unlisted assets (Warren 1). Consequently, this provides access to a wider investment opportunity set compared to short-term investors.
On a different note, Marcuse (83) urges that a long-term investment must not be opposed, but instead, it needs to be considered a contributing factor to the smooth function of financial markets. According to the author, the extreme volatility witnessed in the financial markets and, in some cases, the lack of liquidity, are mainly associated with the behaviors of short-term investors. For the financial markets to perform better, they require investors with a different view concerning the actual value of the assets being invested and, to a larger degree, require investors with different timings. Usually, investors with a long-term horizon consider the intrinsic value of assets instead of following the market tendency in the near future and have a higher likelihood of acting in a counter cyclical manner. As such, financial markets require long-term investors so as to achieve the most suitable pricing for the listed assets (Mareuse 83).
Despite the benefits of long-term investment and the possibility for increased gains, most individuals and businesses venturing in long-term investors experience several challenges that adversely affect them as they seek to grow their investments. As such, this has led investors who sought long-term investments to invest when the returns are high and drop their investment when returns are low (Ivashina et al. 14). Consequently, this affects their ability to grow their businesses. Research reveals that private and public long-term investment levels in a significant number of countries are still below the pre-crisis levels (Slijepčević 76). According to the author, underinvestment in the long term is associated with adverse effects on the sustainable development of regional and local levels (77). Therefore, making it long-term underinvestment a social problem that needs to be addressed.
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Order Paper NowLong-term underinvestment is prevalent in the US. The companies and investors in the US are frequently criticized for focusing mainly on short-term investments and neglecting long-term investments (Kaplan 108). According to the author, companies in the US destroy value by failing to invest in the long run. This proposal will identify the various challenges that impede long-term investors from investing and growing their investments. I will further provide practical solutions to the identified challenges. This paper aims to prepare new and potential long-term investors by informing them on the probable challenges they are likely to face and how they can address them.
The existing literature concerning the challenges facing new long-term investors is limited in scope. To identify the challenges facing new long-term investors, I conducted a systematic and content analysis of the existing literature related to this topic. Besides US, European Union (EU) countries are also facing long-turn underinvestment. Supporting this statement, Slijepčević (76) urges that private and public investment levels in most EU countries are below the pre-crisis levels.
Keerthivarman and Ram explored the new challenges facing long-term investors in the modern-day world. These researchers identified ten key problems facing long-term investors today. These challenges include (1) excess debt; (2) lack of sufficient economic growth to settle that debt; (3) existence of many insolvent banks; (4) excessive off-balance-sheet claims against taxpayer (finite government) resources; (5) exhaustion of investors’ armoury of the conventional by the central banks; (6) uncontrolled monetary stimulus within the general setting of fundamentally unsound money; (7) increased debasement of currency; (8) increased manipulation of the main classes of assets courtesy of the challenges experienced; (9) lack of unimpeachably and objectively safe-havens, and (10) political challenges (Keerthivarman and Ram 545). Keerthivarman and Ram have not identified the specific solution to each of the identified challenges. However, they urge investors to have an investment on a long-term basis. They claim that no investing type is superior to the other as they both have benefits and drawbacks. However, they urge investors that dynamic exchanging is not right for individuals without suitable time, instruction, and monetary assets ( Keerthivarman and Ram 546). Thus, the reason why they support long-term investment. The authors also urge investors to be concerned about taxes but not worry about them since putting charges to the exclusion of everything is a dangerous practice.
Ivashina et al. (17), in their book, which discusses the challenges and benefits of long-term investment, has identified various key challenges facing long-term investors. One of these challenges includes insufficient incentive schemes to reward employees for contributing towards long-term performance, poor processes for choosing investments based mainly on the safety of a renowned brand name, or the fashionable nature of an area instead of the nature of the investment. According to Ivashina et al. (17), this mostly results from advisers and boars who fail to guide the investor in the right direction. The third challenge identified by the authors is the lack of tools for measuring investors’ own financial position, the level of their need for future capital, the number of risks they are exposed to, or how well they are doing. Another challenge facing long-term investors is the failure to communicate effectively to their stakeholders or partners on what they are doing, which results in cascading series of challenges. Ivashina et al. (17) further reveal that long-term investors face the problem of improper incentives that result in investors’ temptation to increase assets being managed relentlessly, even when they generate low returns. Additionally, exploitation of marketing power by established capital groups as well as lack of coordination among investors bypass most principles of good governance, thus acting as a challenge to long-term investors (Ivashina et al. 17). The authors do not provide ways of dealing with the identified challenges.
Research by the Statista research department conducted in 2014 also outlines various factors that adversely impact investment progress worldwide. Among the identified factors include inflation, investors making a wrong investment decision, low economic growth in investment countries, high market volatility, a higher burden of tax, low global growth, low interest rates, geopolitical instability, weak Europe economy, lower economic stimulus in the US, high interest rates on credits, and lack of concern (Statista Research Department, n.p).
The literature reviewed revealed several challenges facing long-term investors. Due to the numerous challenges identified, it is not practical to define practical solutions to each of the challenges in a single proposal. As such, I used the most recent report by the Statista research department, which defines the factors that negatively affect investment progress globally, to identify the most significant challenges to develop solutions. The report from the Statista research department presents these factors that adversely impact investment progress in order of their significance, making it easier for me to define the challenges that require to be addressed with immediate effect. The degree to which how each factor affects investment progress is expressed in percentage. According to this report, inflation is the most significant factor that adversely impacts investment progress (49%), followed by wrong investment choices by investors (37%). The third factor is low economic growth in investment nations (33%), followed by increased market volatility (32%). The fifth significant factor is increased tax burden (31%), while the rate of inflation is important as it represents the rate at which the real value of an investment is eroded and the loss in spending or purchasing power over time, Which is followed by low global growth (30%). According to the report, low interest rates, geopolitical instability, and weak European economy account for 30%, 29%, and 29%, respectively. The low economic stimulus in the US accounts for 24%, while rising interest rates as a factor of impending investment progress account for 11%. The least significant factor that adversely impacts investment progress is the lack of investors’ concern, which accounts for 7% (Statista Research Department, n.p). Factors that were covered in the Statista report were a summary of the main challenges facing long-term investors identified in the literature review. As such, this summary was useful in identifying the most significant challenges that needed to be addressed.
The chosen challenges that have been chosen whose solutions will be provided include the issue of inflation, investors’ wrong decisions, low economic growth in the investment countries, higher market volatility, and higher tax burden. Inflation may adversely affect an investor’s purchasing power over time, making it hard for long-term investors to continue with their investment. Wrong investment decisions may involve different aspects, such as an investor investing in an investment they do not understand, investing in businesses with too much investment turnover, and failure to diversify. When an investor makes a wrong investment decision, it becomes challenging to successfully run the investment. Low economic growth in an investment country means that the investment will have lower yields. This may be a challenge to most long-term investors as their goal is to gain returns after some period of time. On the other hand, market volatility is a situation whereby the market experiences periods of unpredictable and often sharp price movements. This is a significant challenge to long-term investors since sometimes they may buy stocks when prices are high and when the prices decline, this adversely affects them. The tax burden is also a major challenge to investors as all investors are expected to pay taxes when the taxes may be too high in some cases. In the following section, I will provide a practical solution to each of these challenges.
The immediate challenge when volatility is experienced is to respond to the situation urgently. However, investors need to learn how to handle this and carry it out in the future. The best beginning point is to appreciate the link between volatility and emotions. Therefore, investors need to focus on their investment goals and ignore the inconsistencies in the market rather than acting based on emotions. Additionally, the subsequent stage is establishing a strategy to handle the associated emotions. Preparation is vital, and the trick is to anticipate the unexpected, which is not easy to do. This is because volatility makes the investors wait for extended periods for their decisions to offer the success they wanted, which may lead to anxiety and trepidation, which may affect the investor’s confidence. Therefore, investors have to prepare themselves for volatility and devise an effective strategy to manage their expectations during periods of delays.
If investors anticipate that inflation will be a factor during their investments, the best solution is to keep investing in money market funds when they are making cash-type investments. Even though the money market funds are paying very little currently, they are the best solutions during periods of increasing inflation. This is because the rates of money market funds fluctuate progressively with interest rates, and they adjust upwards automatically as the interest rates increase. Since the interest rates of the money market increase with the general market, the investors do not have to experience the loss of market value that affects the fixed investments during inflation periods. This indicates that there is no need to chase cash-type investments that are higher-yielding during periods of inflation because money market funds are interest-bearing investments. The other alternative to money market funds is the Treasury Inflation-Protected Securities (TIPS) which are offered by the treasury.
Investors may avoid making bad investment decisions by improving their decision-making process or by improving their financial expertise. One way of improving investment decisions is establishing an individual investment roadmap since investing is a risky undertaking even to the most experienced investors. Investors need to consider their financial situations substantially and make a financial plan for their investments. Additionally, investors can also consult financial advisors to guide them through the decision-making process in order to get financial security over the years. After making a plan, investors need to define their risk appetite prior to making the decision in order to decide the investment portfolio to put their finances in. If investors want to get financial security, they have to be cautious with their risk appetite. After determining their appetite, investors need to spread their money in different investment portfolios to minimize the risk of losing extensively. Investors need to understand that every investment is risky, and they need to diversify their portfolios in order to keep their returns. To avoid losses, investors need to keep emergency funds to cover them in case they lose their investments. Smart investors continuously set some money aside to ensure that they are covered when their investments are not successful.
To solve the issue of taxes, investors need to take a long-term view when making their investments. In the United States, investors are exposed to maximum tax liability when they make short-term investments. However, the long-term capital gains taxes are more favorable and therefore reduce the investors’ tax liabilities.
Overall, long-term underinvestment is a significant challenge that needs to be addressed given that it is contributing factor to the smooth function of financial markets. However, long-term investment in most countries is still in crisis. This proposal aimed to identify challenges facing new long-term investors while growing their investment and provide practical solutions to the top five challenges. The most significant five challenges facing new long-term investors identified include the issue of inflation, investors’ wrong decisions, low economic growth in the investment countries, higher market volatility, and higher tax burden. The best way of dealing with the challenge of volatility is by first appreciating the link between volatility and emotions. On the other hand, the best way of dealing with the inflation challenge is by investing more money when making cash-type investments. Poor investor’s decision can be delt with by establishing an individual investment roadmap. Lastly, to deal with the issue of high taxes, an investor needs to take a long-term view when making their investments and avoiding being too much worried about the taxes as Keerthivarman and Ram (546) recommend. Since in this proposal, there are more than five challenges identified. In the next proposal, I will address how the remaining challenges can be addressed to improve long-term investment.
Works Cited
Harvey, Rachel, et al. “Global Public Goods and Investment Obstacles: A Survey of the Long-Term Institutional Perceptions1.”
Hue, B., et al. “Investment risk for long-term investors: risk measurement approaches: Considerations for pension funds and insurers.” British Actuarial Journal 24.16 (2019): 1–52. https://doi.org/10.1017/S1357321719000102
Ivashina, Victoria, and Josh Lerner. Patient capital: The challenges and promises of long-term investing. Princeton University Press, 2021.
Kaplan, Steven N. “Are US companies too short‐term oriented? Some thoughts.” Journal of Applied Corporate Finance 30.4 (2018): 8-18.
Keerthivarman, Ponnimay and Ram, Murugan. New Challenges of Long Term Investors. International Journal of Pure and Applied Mathematics, 119.17 (2018): 537-549
Marcuse, Olivier. “Fostering Long-term Investment and Economic Growth: A Long-term Investor’s View.” OECD Journal: Financial Market Trends 2011.1 (2011): 83-86.
Slijepčević, Sunčana. “The impact of the economic crisis and obstacles to investments at local level.” Transylvanian Review of Administrative Sciences 14.55 (2018): 62-79. http://dx.doi.org/10.24193/tras.55E.5
Statista. “Factors With Possible Negative Effect On Investment Progress 2014 | Statista”. (2014), https://www.statista.com/statistics/323386/factors-possible-negative-effect-investment-progress/.
Warren, Geoff. “Benefits (and Pitfalls) of Long-Term Investing.” CIFR Paper 40 (2014). http://dx.doi.org/10.2139/ssrn.2513089
World Economic Forum. Global Agenda Council Report 2011-12. Network Of Global Agenda Councils Reports 2011-2012, https://reports.weforum.org/global-agenda-council-2012/councils/long-term-investing/.
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