Despite how easy digital investment management platforms have made investing, it shouldn’t be something you do on a whim.
In fact, if you decide to enter the investing world, make sure you’re in it for the long haul. Sticking with your investments for a number of years comes with many advantages – here are five benefits of long-term investing.
It can help ride out the market bumps
If you’re new to investing and you experience your first market drop, it can be quite stressful. Your first instinct may well be to sell your investments, however, by jumping ship you’ll make your losses real. Think about it, if you remain invested during difficult times, all you’ll see is a number go down on your dashboard, and this figure could well go up in the future when markets bounce back. But if you were to take your money out, you’d make an actual loss.
An example that has since gone down in stock market history is Black Monday, when the Dow Jones Industrial Average lost more than 22% of its value on October 19th, 19871. The majority of investors left the boat, but those who didn’t panic, and stayed invested in large cap stocks, were rewarded with total returns of 16.6% in 1988 and 31.7% in 1989 - this, after one of the most severe drops in history!
Even some of the best investors can react to a market bump, even if it’s a small one. However, market bumps won’t knock you so much if you’re investing for the long-term. There’s a phrase common to investing which goes something along the lines of: ‘the ball may drop, but you’ll want to make sure you’re there for the bounce’.
Market volatility, when financial markets are going up and down, is a common phenomenon, and long-term investing is a good way to handle it, as it helps smooth out market bumps. In fact, people who invested for any 10-year period since 1984 until December 2020 in the FTSE 100 index, have an 89% chance of making a gain2. Investing even during the difficult times could help investors smooth out the highs and lows.
2 Based on a calculation made by our internal team from Bloomberg data
It gives your money more time to grow
The longer you remain invested, the longer your money has to grow. You’ll do this through the power of compound returns.
How do compound returns work?
If you imagine a snowball rolling down a hill, steadily growing in size as it accumulates more snow, then you’re close to understanding how compound returns work. Year on year, any returns on your investment get invested again and, just like that, your money grows over time.
It’s important to remember that you will mostly benefit from the wonders of compound returns with a long-term strategy. Only then can you truly make your money work harder.
Here’s an example of compound returns:
Joe invests £10,000 and earns 5% dividend on this investment. In year one, Joe makes £500, which is paid back into his fund. In year two, Joe makes a return of £525, because not only has he made a return on his initial £10,000, but also on the £500 invested dividend he has earned in the previous year. Repeated over several years, compound returns could help Joe’s investment flourish.
It means less trading fees
Every time you buy and sell investment, you’ll be paying trading fees, so the more you jump in and out of the market, the higher your trading fees could be. The more an investor pays in trading fees, the less returns they’ll get to keep. Remaining invested for a number of years could help you keep these fees to a minimum and make the most of your returns.
It’s easy to do
You don’t need extraordinary trading skills or savvy financial know-how to remain invested over the long-term - all you need is a great dose of patience and a strategy to make the most of your returns. One way to do this would be to take out a Stocks and Shares ISA. With a Stocks and Shares ISA, you can invest up to £20,000 and you don’t pay tax on any returns you make - there are plenty more benefits, which you can learn about here.
Getting started with an ISA is really easy. With robo-investing platforms, like Wealthify, the hard work is done for you and all you need to do is choose how much to invest and select the risk level that suits you.
It removes emotions from the equation
It may be one of the few instances in life where a less emotional approach is better, but when it comes to your finances, we recommend that you listen to your head and not your heart. If you’re tempted to abort mission at the slightest market sneeze, you need the composure to step back and assess the situation. Be patient and keep your long-term perspective intact. That way, you will stay focused on your long-term goals and you’ll be less likely to make irrational decisions.
A long-term approach will prevail
Long-term investing comes with many benefits and the statistics don’t lie. With a composed approach and a long-term investment strategy, you could potentially grow even the smallest amount of savings into a decent sum of money.
The tax treatment depends on your individual circumstances and may be subject to change in the future.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.