What are the benefits of long-term investing?

Long-term investing could help you to maximise the growth potential of your money by allowing you to ride the ups and downs of the stock market. Here’s why.
What are the benefits of long-term investing?
Reading time: 7 mins

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, one thing to consider is how long you actually want to invest for, and whether you're prepared to be in it for the long haul. As a matter of fact, sticking with your investments for a number of years could bring many advantages – so, here are five benefits of long-term investing.

It could help ride out the market bumps

If you’re new to investing and you experience your first market drop, it can be quite stressful, and your first instinct may well be to sell your investments. However, by jumping ship you’ll make your losses real.

Just 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, remember that markets can go up, as well as down, and thinking about the long-term when you invest could help your investments to recover from any dips you encounter along the way.

In fact, there’s a phrase common associated with 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 could be something to help smooth out market bumps. In fact, History suggests that people investing in the FTSE 100 Index during any 10-year period since 1984 had an 89% chance of making a positive return on their money.2 So, investing even during the difficult times could help investors smooth out the highs and lows. 

It gives your money more time to potentially grow

The longer you remain invested, the more time your money could have to potentially 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 could grow even further over time.

With that in mind, having a long-term strategy could help you to benefit from the wonders of compound returns. 

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 - just simply having a great dose of patience and a strategy in mind could be helpful in enabling you make the most of your returns. One way you could do this is by taking out a Stocks and Shares ISA. With a Stocks and Shares ISA, you can invest up to £20,000 per year in 2021/22 (though this is subject to change) and you don’t pay tax on any returns you make  - and 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 could help to remove emotions from the equation

It may be one of the few instances in life where a less emotional approach could be benefiical, but when it comes to your finances, you might want to listen to you head and not your heart. If you’re tempted to abort mission at the slightest market sneeze, it could be helpful to step back and assess the situation before you make any decisions. Staying focussed on your long-term goals could help you to avoid irrational decisions based on your emotions at the time of a market dip.

 A long-term approach could 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.

You should seek financial advice if you're unsure about investing.

 

  1. https://www.forbes.com/sites/investor/2012/10/19/lessons-from-black-monday/#4618ac7532d1

  2. Bloomberg data

 

Share this article on:

Wealthify Customer Reviews