Long Term Investing Advantages
There are so many ways to invest for your financial future. Most take the passive approach buying shares in publicly traded companies, mutual funds or ETFs and go do other things with their lives. Others prefer a more active approach where they feel more in control of their destiny such as rental properties. Others choose to diversify in both buckets.
There are so many options, there are thousands of publicly traded companies, thousands of mutual funds and ETFs and even more private company options opening up to everyday investors. The only consistent formula every investor needs is to focus on long-term investing.
Long term investing increases your chance of hitting your financial goal whether saving for a home or saving for retirement. The longer your investing horizon the more time you have to make up for mistakes along the way. Here are 9 reasons why.
1. Reduced Emotional Response
If you are investing for 10, 20, 30 or more years you should not be watching the markets on a daily basis and remove yourself from the emotional response of watching markets daily fluctuations. For long term investing if you find a great business and you are able to buy it at a reasonable valuation the daily stock ticker should not matter to you, your focus should be on the fundamentals of the business and adjusting your outlook based on the changing economic environment.
2. Overtime the best businesses rise in value
Any given day is probably a coin flip on if the share price will be up or down. But a great business executing their business model is almost guaranteed to be worth more a decade from now.
3. Let compounding thrive
The longer you hold onto a growing investment (stock, real estate, mutual fund, etc.) the more compound growth you can achieve. When you are accumulating wealth you should reinvest dividends, interest and rental checks into more wealth building assets since this is how compounding wealth shines. For example a 3% dividend reinvested will double your investment in about 10 years assuming no change in the companies share price.
4. Long Term investing is easy
Anyone kind find several great companies to buy or pieces of real estate to own and hold onto them for 10, 20, 50 years. You may not do as well as Warren Buffett but you will definitely do better than 90% of active traders with a lot less stress and hassle.
5. I like to sleep soundly at night
Without having to worry about how the market is do tomorrow or next week I can sleep like a baby every night.
6. The time to correct investing mistakes
We all make mistakes however short term traders have very little time to adjust strategies to continue to earn their required rates of return.
While with a portfolio of save 20 great businesses, if 1 or 2 fall on hard times you will not destroy your long term financial future since you still have 18 great business working to grow your wealth. Avoid hoping things work out and take the long term approach.
7. No one likes paying taxes
The highest paid taxes are short term investors. By holding for just a year you reduce the tax burden from original income rates to 20% long term capital gains rates. The beauty of long term investing is you do not pay capital gains tax until you sell. So holding a stock for 20 years has 20 year tax advantage to someone buying and selling stock held for 1 year. Investing in the right companies the tax saving is huge and could result in hundreds of thousands of dollars of difference.
8. Commission matter less
A $10 or more commission paid once per decade hardly matters at all. Where a $10 commission paid daily, hourly, etc. takes a huge chunk on your potential return.
9. Less investment risk
Short term traders by and large have been proven to miss the most important market movements. If the market action scares you out of your investments and you fail to get back in for the 10 biggest moves in a decade could have you under performing the SP 500 index by hundreds of percentage points.
Hopefully you have enjoyed this Financial Literacy series. Get out there and improve your financial future.
Disclosure: I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article. The information provided should NOT be considered advice. The topics discussed are risky and have the potential to lose a substantial amount. I am not an investment professional and therefore do not offer individual financial advice. Please do your own research before investing.