When it comes to investing for your future, there are myriad paths you could take. There are more than 7,000 publicly traded stocks to choose from, many types of investment vehicles, and ample opportunities to invest on your own or seek the financial help of an advisor. Long story short, there’s no set formula or path that investors are encouraged to follow to hit their retirement number…save for one: long-term investing.
Investing for the long term offers a number of advantages that investors who try to time the market, or day-trade over the short term, simply can’t take advantage of. Here are nine reasons long-term investing is undeniably the smartest and easiest path to hitting your retirement number.
- Long-term investments almost always outperform the market when investors try and time their holdings.
- Emotional trading tends to hamper investor returns.
- The S&P 500 posted positive returns for investors over most 20-year time periods.
- Riding out temporary market downswings is considered a sign of a good investor.
- Investing long-term cuts down on costs and allows you to compound any earnings you receive from dividends.
Better Long-Term Returns
The term asset class refers to a specific category of investments. They share the same characteristics and qualities, such as fixed-income assets (bonds) or equities, which are commonly called stocks. The asset class that’s best for you depends on several factors, including your age, risk profile and tolerance, investment goals, and the amount of capital you have. But which asset classes are best for long-term investors?
If we look at several decades of asset class returns, we find that stocks have generally outperformed almost all other asset classes. The S&P 500 returned an average of 11.82% per year between 1928 and 2021. This compares favorably to the 3.33% return of three-month Treasury bills (T-bills) and the 5.11% return of 10-year Treasury notes.
It’s really easy for anyone to do
One of the greatest aspects of long-term investing is that anyone can do it. It doesn’t take a Warren Buffett to pick out a portfolio of well-run businesses and hang onto them for 10, 20, or 50 years. Sure, you’re not always going to be right, but don’t worry, even the greatest investors are wrong a third of the time — or more. But with long-term investing there are no hassles about learning different trading styles or platforms since you won’t be an “active trader.”
Historically, if you align your portfolio for the long term, you’re more likely to make money. Although stocks do have a roughly 50-50 chance of rising or falling, stocks can only fall to $0, but they can rise infinitely. If you let your winners ride, there’s a good chance that, over the long run, you’re going to see your portfolio grow in value, especially if you focus on high-quality businesses.
Emerging markets have some of the highest return potentials in the equity markets, but also carry the highest degree of risk. This class historically earned high average annual returns but short-term fluctuations have impacted their performance. For instance, the 10-year annualized return of the MSCI Emerging Markets Index was 2.89% as of April 29, 2022
Uncovering the Long-Term Investing Mindset
Overall, a long-term investment strategy involves holding assets for more than one year. This strategy entails holding a mix of assets, such as bonds, stocks, exchange-traded funds (ETFs), and mutual funds. Individuals with long-term vision must be patient and disciplined. This is due to the fact that they must be able to take a degree of risk while anticipating bigger future profits.
Long-term investing is likely to provide substantial wealth gain. This way, numerous individuals who lack the skills to participate in derivative markets plan their financial futures based on long-term investment returns, which may include dividend income from the ownership of stocks and interest income from fixed deposits.
Exploring the Benefits of Long-Term Investment Stocks
Holding stocks for the long term brings a plethora of advantages for those who are patient enough:
One of the best aspects of long-term investing is that it eliminates your emotions nearly entirely. Long-term stock investing allows you to focus on the meat and potatoes of your investments, such as a company’s long-term growth potential or the viability of a new business strategy.
Maintaining a long-term perspective helps you control your emotions. You do not need to be concerned about whether you will make a profit or suffer a loss the next day or a few hours and lose sleep over it. Investing decisions may be influenced by emotions, leading to illogical, impulsive choices. Long-term investment implies you are less concerned with daily variations in share prices and can instead focus on your long-term objectives.
Long-term investing is advantageous due to the relationship between volatility and time. Investments kept for longer periods are often less volatile than those maintained for shorter durations. The longer you invest, the greater the likelihood that you will be able to endure market downturns. Long-term returns are often higher for assets (such as stocks) with higher short-term volatility risk than for assets (such as money markets) with lower short-term volatility risk.