While some of the world’s most successful investors strongly advocate long-term investing, many of us are quick to cash in at the slightest hint of uncertainty. But why is long-term investing so important? And why should we condition ourselves to stay the course even when times get tough?
Here are a few things to keep in mind when you feel like cashing in:
There’s unlimited upside – Every investment that you make comes with some level of risk, but investing for the long-term provides greater opportunities to make profits and come out on top. For example, a stock portfolio will have limited downside, but unlimited upside – a stock’s price can only fall to zero, but the opportunities for growth are infinite. When you invest over the long-term, you are effectively making the most of the growth potential of your investment.
It’s easy to do – It is also fairly easy to invest over the long-term because it removes the noise associated with ‘active trading’. Investing over the long-term only requires investors to focus on picking companies with strong fundamentals that will stand the test of time. Investors also have the peace of mind in knowing that they have made sound investments that they are less likely to get burnt by.
It removes lost opportunities – This is one of the biggest advantages of investing over the long-term. No one can predict how the market will move, and cashing in during uncertainty can mean that you miss out on the days that provide the greatest profits. Staying invested reduces your chances of missing out on the biggest days that play a pivotal role in providing exponential returns.
You benefit from compounding – Time is the single most powerful wealth building tool for investors, and investing in the long-term allows you to take full advantage of the magic of compounding. Compounding simply refers to the process of your principal and its returns being continuously reinvested over time – in turn generating exponential returns that are much greater than the returns of short-term investments. You can read more about compounding in our previous article.
You can make informed decisions – Staying invested over the long-term can provide you with insights that are not available to short-term investors. For example, you can identify and increase your exposure to investment opportunities that have performed well over time. You will also have insights into good investments that are experiencing a rough patch – allowing you to pick these up at discounted rates.
It smoothens volatility – Investing over the long-term means that you don’t have to constantly worry about short-term movements in the price of your investments. When you invest in the short-term, behavioural changes in the market (which are inevitable) can cause stress and tempt you to cash in. Over the long-term however, these fluctuations smoothen and reveal the fundamental value of your investment.
While these are just some general reasons on why you should invest over the long-term, the value proposition is clear. We are in the midst of some extremely volatile times that could tempt us to hang up our gloves and get back in on a sunnier day – but you can’t time the market. Picking the right investments and staying the course during these times of uncertainty will mean that you will one day reap your rewards.