So, you’ve decided to become a long-term investor. But, what are the actual benefits you stand to gain from an investment strategy that focuses on your returns in years rather than days or months?
Avoid the bumps
Over short timescales, like days and weeks, financial markets are typically unpredictable and illogical. Even the highest-paid professionals can’t say with any certainty what’s going to happen to markets tomorrow – and if they could, they’d be retired already. But, as a long-term investor you’re focused on your annual returns compounding over many years. You can mostly ignore the short-term blips, as over time, they won’t matter.
Hit the sales
Dips in the financial markets like those seen after the UK Referendum are a long-term investor’s equivalent of a Black Friday sale. Since you’re planning on holding investments for years, buying stocks at a cheaper price is an opportunity to increase your long-term profitability, since prices often bounce back, and sometimes quickly.
Increase your chances of a better return
The longer you invest, the more likely you are to enjoy higher returns from your investments than from your cash savings. We know from looking back at how markets have performed in the past that investors have a 90% chance of beating their cash savings returns if they hold onto their investments for 10 years, and a 99% chance if they hold them for 18 years†. With interest rates at a record low, that’s a more potent message now, than ever.
Enjoy the power of compounding
As a long-term investor, you stand to benefit from something Einstein called ‘the most powerful force in the universe’ – not gravity, but compound interest. Billionaire, Warren Buffett, one of the most successful investors of all-time, claims compound interest is the single most powerful factor behind his investing success. Earning interest on your interest as well as your original investment can make a huge difference over time, particularly if you’re adding even small amounts to it regularly.
Take someone who wants to save regularly to supplement their pension, as an example. If they begin investing £100/m at the start of their career, after 45 years they could have as much as £390k to put towards retirement1. If they wait until they’re 30 to start however, and they’ll amass less than half2 that amount (£184k). That’s the effect of compounding.
If there’s a moral to all of this, it’s that you should think long-term. Just take the last major financial crisis as an example. Someone investing in the FTSE 100 in late 2007 would have, shortly afterwards, suffered one of the most severe investment declines in history. But if they held their nerve, 8 years on they’d now be enjoying a 50% profit on their original investment.
Investing doesn’t have to be hard work. If you are a long-term investor, just have a game-plan, trust the power of compounding and leave the rest to the experts.
Please remember that past performance is not a guarantee of future returns and with investing comes risk. Your investments could go down as well as up and you may get back less than you put in.
† Barclays Equity Gilt Study 2016 (P60-61 Figure 8) http://hungrydummy.com/media/pdf/EquityGiltStudy2016.pdf
1 Predicted value of £360,616 based on an account opened with £250 and paying in 100/m investing for 45 years on a high risk (Adventurous) plan. 2 Predicted value of £184,925 based on an account opened with £250 and paying in 100/m investing for 35 years on a high risk (Adventurous) plan.
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The comments and opinions expressed in this article are the author's own and should not be taken as financial advice from Wealthify.