Why Long-Term Investors Win

Whether you’re a newbie to investing or have experience, you must have commonly heard the advice that you should stay invested for the long term. There is truth to that. There are traders in the market who make trades day in and day out. However, if you are simply an investor looking to make your money work for you, long-term investment may be the better option. Let’s look at the reasons for that.

1. Emotions are out of the equation

The markets go through highs and lows. Attached to them are our hope and apprehensions. If you are committed to your investment for the long-term, you will not give in to your emotions if there is a sudden dip. On the other hand, you will not buy into short-lived hype that takes the market up.

Stick to the strategy that you have created and turn away from the daily swings of the market. Once your emotions stop guiding your investments, you will be able to plan practically and with a long-term vision.

2. Historical Returns

If you trace market performance backward, you will see that long-term investments usually pay off. They are more profitable and stable over time. Effectively, a longer duration allows short-term volatility to settle down and reap returns. Technically, a particular asset can only fall as far as 0 in value. However, there is no upper limit in growth. If you give the winning assets in your portfolio time, especially those of high quality, they will likely grow in value. As the current markets right now are unstable, many people become worried about their investing portfolios. However, as you can see from the graph below, the S&P 500 over nearly 100 years of volatility have remained up during all times of economic lows.Ref: Morningstar Direct – S&P 500 Index, St. Louis Federal Reserve. Data as of 3/31/2020.

3. Compounding

Compounding is a tool effective in life as a whole and in investing specifically. It is about slowly and steadily contributing towards your investments. You may not have the available funds to invest in one go. However, over time, you can keep building your portfolio bit by bit.

The rules of compounding show that such consistency is important to build discipline in your commitment to wealth creation. More importantly, time works to your advantage because you can reinvest short-term returns for a longer duration. As you create a pool of funds to invest with that keeps growing, your returns will grow simultaneously. The graph below shows the power of compound interest and time spent in the market. The difference that just 10 years can make to an investment is massive.

4. Correcting Strategies

If you want to create a financial plan for the future, you will have to start working now. However, you won’t know if your plan works unless you implement it and give it the time to show results. Short-term planning does not offer you the flexibility to adjust with changing times.

Think of it this way, you have a retirement plan for which you have a particular set of investments. But you realise that after a certain point, your returns start stagnating instead of growing. If you have a lock-in period of 5 years and you need the funds in your 6th year, you cannot do much with the funds that are locked into the asset. However, if you need a certain amount of funds 10 years later, after the lock-in period is over, you can move the funds to an asset that can grow. Such course correction requires the luxury of hindsight wherein you can look at the results over a certain time period and adapt to your needs accordingly.

Similarly, if you have an unexpected emergency, this strategy can help you to replenish unexpected expenditures over time.

We would always recommend that you speak and plan your finances with qualified financial advisers who can put a plan in place for your needs and wants.

5. Lower Risk

As we discussed, the market volatility settles over time. This means that ups and downs become smoother. It lowers the risk that you have to face. When it comes to booms and busts, they may be short-lived. So, while you face high risks in the short term, these are set off over time. Logically, if your returns stabilise over a few years, it is because the risk is alleviated. It also means that you don’t risk missing out on big gains. You can try timing the market all you want, but time spent in the market will almost always work better.

6. Tax Savings

Returns are subject to capital gains tax. However, if you are invested for more than one year, the tax liabilities are significantly lowered. It still depends on your income, but the amount you will have to pay will be less than what you would have to pay as a daily trader.

Overall

The points above demonstrate how long-term investing wins against short-term investing. It’s about time in the market, not timing the markets.

If you would like to speak to one of our advisers regarding the current global markets and your investment strategies, contact us today.