Investment markets are not for the faint-hearted, and this is especially true for the trader, speculator or those who attempt to time markets. On the other hand, those who are invested to achieve longer-term investment objectives can expect to enjoy a smoother, less emotional ride – provided they keep their emotions in check. If you’re invested for the long haul, here are some of the benefits of taking a long-term view.
Smoothes out market fluctuations
Firstly, knowing that you are invested for the long-term helps you to ride out market fluctuations that are endemic to the environment. Market volatility is completely normal, and short-term fluctuations serve only to distract investors. History has shown us that over the long-term markets move in an upward trajectory and that, while markets may fall, they have always bounced back. If you exit the market on a downturn, you effectively lock in your losses. On the other hand, staying invested – even when markets drop – means that you are in the markets when the tide turns. While the value of stocks can drop significantly over the short term, stocks/equities tend to deliver higher returns over the long term, despite financial setbacks such as Black Monday, the tech bubble, and the financial crisis. From historical analysis, we have learnt that markets never go in one direction continuously, but fluctuate in response to economic, political and global events, as has been evidenced by the coronavirus pandemic.
Provides more time for interest to compound
A significant benefit of long-term investing is that provides more time for compounding interest to work its magic. Simply put, the longer you remain invested, the longer your money has to grow as a result of the exponential effects of compounding. Taking a long-term view of your investments gives you more opportunity to reinvest your profits, which in turn increases your potential for further profit. Reinvesting your returns rather than cashing them in means harnessing the power of compounding which ramps up the longer you keep doing so.
Costs less in trading fees and commissions
Every time you buy and sell stocks it costs money, which means the more you trade, the more fees you’ll be paying, and this will have a direct impact on your investment returns.
Requires less time and skill
Long-term investing involves less time but more patience and often requires the investor to do absolutely nothing – which is sometimes more difficult than it would appear. That said, keep in mind that doing nothing requires less skill. If you’ve sought advice and implemented a long-term investment strategy, then the extent of your involvement should be a quarterly or annual review of your portfolio to ensure that it remains aligned with your goals. As Peter Lynch once famously said, ‘Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.’
Humans are emotional beings which is generally a good thing – except in the context of investing. Market volatility can wreak havoc with our emotions and lead us to make irrational decisions based on greed and fear rather than on logic. In the face of market drops, many investors intuitively know that they should remain invested but succumb to their emotions and sell out instead. In doing so, they lock in their losses, interrupt the process of compounding, and place themselves at risk of poor market timing. However, those who are invested for the long-term can reap the benefits of removing emotions from their decision-making and staying focused on the long-term investment goals.
Provides better long-term returns
We know from decades of historical data that stocks have outperformed almost all other assets classes and that investors have experienced a much higher rate of success over the longer term. Remember, the lowest that the value of any share can fall is to R0, but the extent to which the value of the share can rise is infinite. By committing yourself to a well-diversified investment strategy that is designed with a specific goal in mind, you increase your chances of maximising your returns over the long term.
Investors are poor market timers, especially because many investment decisions are driven by emotions. Many market timers compromise their investment outcomes because they are not invested when markets start to rebound, and they only get back into the market once the bulk of the gains have been made. Investors who monitor every market fluctuation generally scupper their chances of making gains simply by trying to time the markets too frequently. Rather than trying to time the markets, investors should consider how the markets have always behaved and that, despite the short-term market fluctuations, markets have shown that they move in an upward trajectory. Steering clear of market timing means reducing investment risk by removing the potential for lost opportunities and ensuring that you are invested for the good days. The research is clear: most investors who try to time the markets underperform against those who stick to their long-term investment strategy.
Allows you to pursue your goals
Goalsetting is an important part of long-term investing because it allows you to set emotions aside and focus on a pre-determined set of financial goals. When constructing your investment portfolio, be sure to identify a realistic time horizon for each goal and then structure your portfolio in accordance with that time frame. Focusing on your goals will help to filter out the short term noise and focus on the longer-term objectives.
Helps you sleep better at night
As a long-term investor, your emotions are not directly linked to the volatility of stock markets. Without the need to track indexes and market movements on a daily basis, you allow yourself the time and emotional space to focus on what is really important to you such as your family and loved ones, your career or business, lifestyle goals, continuous education, etc. If your long-term investment strategy is aligned with your propensity for risk, this means that your portfolio should not be exposed to more risk than you are emotionally capable of handling.
Allows you to adjust your investment strategy
Long-term investing doesn’t mean that you can never recalibrate your investment strategy – it just means that you should only adjust your strategy if your personal circumstances or objectives change. For instance, if your investment strategy is designed to provide you with a comfortable retirement at age 65 and you subsequently decide you would like to retire at age 60, for instance, you would need to recalibrate your strategy taking this updated objective into account.
Allows you to start with a small amount
You don’t need a sizeable amount of money to begin investing for the long term. In fact, most asset managers make provision for a minimum monthly investment premium of around R500. There are very few barriers to entry when it comes to long-term investing, making it a very accessible and affordable way to build wealth.
Investing towards long-term goals generally means that you are able to take more investment risk, with a greater share of your portfolio allocated to growth assets. It is common knowledge that when it comes to investing, the greater the risk, the greater the reward. With higher expected returns over the longer term, investors have a better chance of increasing the purchasing power of their money by outpacing inflation. Investing appropriately over a longer period of time will therefore reduce the risk that inflation presents to your invested capital.
Investment markets are volatile by nature but, while we can’t control what happens to them, we can control how we react to them. Patience, restraint and composure are key.