The world of investing can seem daunting for first-time investors. With so many avenues to explore and places to invest your capital, it may appear challenging to determine which option suits your unique situation and goals the best.
However, one of the most tried and tested ways to invest your capital is over the long term. Long-term investing comes with a myriad of benefits for both beginner and advanced investors. So, in this article, we’ll cover five of the key benefits that long-term investments can bring – helping you make the best investment decision possible.
1. It Helps Remove Emotional Decision-Making
One of the most prominent benefits of long-term investing is that it helps remove emotion from your investment decisions. Common investment knowledge dictates that investors should make decisions based on objective criteria – so emotion really shouldn’t play a role. That being said, sometimes it can be challenging to leave emotion out of it when markets drop rapidly or your portfolio suffers an unexpected hiccup.
By opting for a long-term strategy, you’re much more likely to accept that these stumbling blocks are all part of the process. Suppose your analysis and due diligence are sound, and you have confidence in the performance of your investment over an extended timeframe. In that case, short-term setbacks are much more likely to be inconsequential in the grand scheme of things.
2. You Reap the Benefits of Compounding
Another great benefit of long-term investing is that you get to experience the rewards that accompany compounding. Compounding your investment is a fantastic way to grow your capital exponentially over a longer timeframe and is one of the building blocks to creating long-term wealth. Put simply, compounding refers to the process of letting your capital build upon itself – the process will initially start slow but will eventually pick up the pace and enable you to generate huge returns on your investment.
As the famous investor Charlie Munger once said – “The first rule of compounding: Never interrupt it unnecessarily”. This concept is crucial to remember, as compounding will only work if you have the discipline to leave your investment long term and hold back from any withdrawals. Again, this ties into the first benefit which relates to removing emotion from your investing – the combination of these two can be a powerful driver of long-term success.
3. Long-Term Investing Can Be a Simple Process
As mentioned earlier, entering the world of investing can be nerve-wracking for beginner investors. The amount of information to consume is overwhelming, and it can put people off when it comes to deciding where to place their capital. However, investing long term is one way to reduce the noise and simplify the process – and often, the results tend to speak for themselves.
Investing over the short to mid-term involves a much more ‘hands on’ approach as regular and consistent analysis are crucial to effective investing. On the other hand, long-term investing is a much simpler process and often consists of identifying an opportunity, making an investment, and leaving it to run. Micro-managing your position is a big no-no when investing over an extended period; this simplification of the whole process ensures that a long-term approach is much more straightforward than shorter-term approaches.
Furthermore, the simple nature of long-term investing means that you can be much more efficient with your time. Strategies such as day trading require a significant amount of time every day to optimise returns. Employing a long-term strategy helps reduce this time expenditure drastically, providing you with more freedom to pursue other tasks.
4. You’ll Experience Lower Levels of Risk
This benefit also ties into the previous one and relates to the element of risk. Optimising your risk/reward ratio is a crucial component of investment success, and this ratio can be affected by various factors such as incorrect management decisions and poor market timing. By holding an investment long term, these factors are much less prominent – thereby reducing your risk.
In addition to this, marketing timing also isn’t a huge concern when investing over a lengthier time horizon. Depending on how you invest your capital, timing the market is an essential factor when investing over a shorter timeframe. This isn’t the case for long-term investing as markets tend to be cyclical, ensuring that if you have missed out on an upswing, then there’s a good chance another one will come around at some point. Furthermore, if you have the discipline to ‘ride out’ times of volatility, then these periods in the market really shouldn’t affect the risk level of your investment – as you’ll be holding your investment regardless, they are mere ‘bumps in the road’, so to speak.
5. Data Is On Your Side
Finally, employing a long term investment strategy has solid statistical backing that can provide investors with the confidence they need to hold their positions through rough periods. Through the previously mentioned concept of compounding, long-term investments have a much higher chance of generating a positive return than short-to-mid term investments.
This success rate is evidenced by a report conducted by Schroders, which found that, over a 148 year period, if you’d invested in the S&P 500 for any month, you’d have made a loss roughly 40% of the time. However, during the same period, if you’d invested for ten years, you’d only lose money approximately 10% of the time. This trend continues for even longer timeframes, highlighting the importance of utilising a long-term investment strategy.
As has been highlighted by the benefits above, implementing a long-term investment strategy can help optimise your risk/reward ratio and free up valuable time that investors can use for other endeavours. Emotions and micro-management can hamper your success rate when it comes to investing – yet using a long-term outlook is a great way to remove these factors and give yourself the best chance of generating a positive return. Although there’s undoubtedly a time and a place for short-term investment horizons, savvy investors are aware of the benefits of investing long term – and often reap the rewards of doing so.
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