Long term investment involves holding assets like bonds, stocks, ETFs or mutual funds for over one year – an approach requiring discipline and patience as you ride out temporary market dips.
Diversifying your portfolio by investing in assets with different maturities, risk levels and yields is also beneficial – here are four reasons why long-term investing may provide better returns than short-term trading.
1. It’s a safer route to take
Many financial goals that people strive towards require long-term investments. From saving for retirement or paying off mortgages to buying a house or paying tuition fees for college educations – investing over time often presents the safer approach.
Reason being, holding investments longer increases their chance of generating greater returns over time due to investments growing steadily and being less susceptible to sudden events that might cause unexpected short-term losses.
Long-term investing also allows investors to reduce brokerage fees, as these tend to be cheaper than shorter-term investments. This is especially true if investors use automated options such as robo-advisors or mutual funds which track markets and manage your portfolio for you. But before investing long term it is essential that you assess your goals – are you saving for retirement in three years or make down payments for houses in three?
2. It’s a more disciplined approach
Long term investments, as their name implies, involve assets held for extended periods of time – usually years and even decades – making them the perfect solution for people with long time horizons. It’s important to keep in mind, though, that long term investments carry greater risks of loss compared to shorter-term ones.
Successful long-term investing depends on having a plan. This involves setting clear financial goals and defining your risk tolerance; for this purpose it would be wise to seek the assistance of an experienced financial expert in setting and meeting those goals.
Staying disciplined through market fluctuations is also crucial to safeguarding your financial future, so having a sound long-term investment plan will come in handy in keeping emotional decisions from derailing your future finances.
3. It’s less prone to hazard
By investing for the long term, you can better weather market turmoil and fluctuations. Your money stays invested for an extended period, enabling it to experience gradual yet consistent growth over time.
Longer time horizons also enable you to take calculated risks that will help outpace inflation over the long term. While no investment can be entirely free from risk, market fluctuations and other external influences like regulatory change or political unrest could impact performance of investments over time. Yet investing for the long run could reduce market risk exposure via compound interest which will produce faster and larger returns over decades and enable you to achieve financial goals more easily.
4. It’s less emotional
Long-term investing tends to be less emotional than short-term investing, because holding on to investments for longer gives more opportunity for them to appreciate in value over time. This is particularly important during volatile markets; when stocks experience downward trends, buying additional shares at discounted prices allows more of your funds to remain invested for an extended period.
Long-term investing requires prioritizing returns that maximize anxiety-adjusted returns – that is, those which offer maximum potential relative to any discomfort and stress they are willing to bear. Doing this requires discipline and patience which often comes at a price.
Anxiety-inducing emotions like excitement may be present when watching your portfolio decline; but investors must remind themselves that this is just part of the process and ultimately their investments will rebound. Additionally, excitement may cause investments to surge upward – an emotional response which may ultimately prove detrimental.
