Long-Term Investing in Stocks
We need to understand the hidden things that happen in the share market to understand why long term investing pays much better. Those who have wisely invested real money for a long time have consistently reaped benefits. Winners like Warren Buffet have depended much on long term investing and have derived consistent success in the market. To compare long term investing with the short term ones, is the obvious issue before the investors.
Short term moves mean you chase the shares quickly, within a short period of time. If you invest at the right time, good gains are expected. The tempting issue is that these gains occur within a short period of time. You go a step ahead and invest again in another share and luck favors you this time as well. Your gains are stupendous. But the investor does not realize about the impending risk that lies ahead. When the shares make the gain in a short time, there is less certainty about the time of their movement. If your timing of investment in such shares is wrong, you are sure to end in losses. The habit of chasing shares is not good. Rather than investing with own volition, take the advice of an experienced broker to avoid the pitfalls.
In reality, long term investments pay much better. You will not incur losses you could have made with the short term decision, when you opt for the long term. In a short term, the chances of zeroing in on a big move are dim. Rather the chances for accumulating losses are real.
The fabled tortoise is a good example for management technique that holds equally well in the area of investment in shares. The investor who has the patience to stay for long term is the likely achiever than the one who chases hot tips to earn fast profits. The golden principle is, time is an investor’s best friend (or the worst enemy if you stretch the waiting period too much) because it gives the compounding time to work its magic. Compounding is a simple mathematical principle where interest on your money in turn earns interest and is added to the principal amount.
The mathematical advantage of startling early for long term investment, does not, however, describe the real world situation. It is unlikely that you will get high returns, over a long period. Sometimes, your investments will earn less and sometimes there could be losses. In between there could be periods when you will earn substantial returns. The advantage of the long-term perspective is that you have scope to correct mistakes en-route. Long-term investors generally invest in a diversified portfolio to derive the maximum benefits and at the same time, play safe.
In the world of personal finance one of the most common recommendations of the investment experts is to be a long-term investor. To be a successful long-term investor is not the easiest of the jobs. In the world of investment, time is mostly related to volatility and the possibility of losing money. It is a well researched fact that of the different primary types of monetary investments, long-term investment in shares gets the top position.
Here are the interesting statistics that prove the point as for the advantages of such investments.
“The long-term (75 years) average return for stocks, bonds and cash (treasury bills, money market funds, etc.) is 11%, 5.3% and 3.8%, respectively.
The average amount each of the asset classes varies each year (standard deviation) is 20% for stocks, 9% for bonds and 3% for cash.
The highest and lowest annual return in the past 75 years has been +54%/-43% for stocks, +29%/-5% for bonds, and +15%/0% for cash.”
The important question is what is the reasonable period to commit to shares in order to have a legitimate chance of earning a return matching with their historical average? With the back-up of the statistical information, the investment experts recommend investment horizons of at least three years and preferably five years or more for equity investments.