Investing seems like it’s a great way to make a quick buck. Buy some shares, make some big gains, flick the shares off and you’ve made a bunch of money. However it’s not that simple and there are far bigger gains to be made from a long term strategy.
Warren Buffett has said, again and again: “If you aren’t thinking about owning a stock for 10 years, don’t even think about owning it for 10 minutes”. If one of the wealthiest men in the world says it, it must be advice worth listening to. So why is long term investing a much better strategy than short term investing?
What is long term investing?
A long term investment is one that has a likelihood of maximising your return over a ten year period. As such, a long term investor focuses on finding quality companies to invest in.
A short term investment is considered to be one that you’ll have for three years or less. Because an investor doesn’t intend to have their money tied up for too long, the long term durability of the company is less important – there just needs to be potential for some quick, short-term gains.
So, what are the advantages of long term investing? Why are long term investments better than short term investments?
Long term investments make more money
Shares are highly volatile as they are subject to market cycles – there are always boom and bust periods. Long term investment takes you through the lows and highs of the market but almost always end up making money. While we seem to remember the busts quite well (Black Friday, 1987; the Dot.com crash; the GFC …) we often overlook that the market experiences a positive movement about 70% of the time and any losses are eventually reclaimed.
Consistently, the best performing investment accounts are the ones where the investor leaves them alone. They just quietly sit there and make money for more than a decade. The investorforgets about them, accepting that there will be losses but these losses will be recouped and further gains made.
The maths
The average rate of return on the stock market for long term investments is around 7% to 10%, depending on who you’re asking and the type of shares you’re talking about. (Note: This historical average helps to make an educated guess as to what the market is likely to do in the future, but there is certainly no direct correlation between time and rate of return. Historical performance is not an indicator of future performance).
Short term investment returns vary wildly; the share market fluctuates – a lot! One year it might be up 5%, the next year down 15%, the next year down 20%, then the next year up 17%. It can be pretty dramatic.Taking your money in and out of the market called “timing the market.” Timing the market may yield some good temporary results if you’re lucky, but over the long-term it’s a no-win strategy.
So as tempted as you may be to intervene and play around with your shares – seriously, leave it alone, chill out and the money will make itself.
Reduced stress and more free time
If you are an ‘active’ investor, you’ll always be looking out for the “Next Big Thing”. Whether it’s a start up that’s going to take the world by storm, or a business that’s recently levelled up and is going to make some big gains, you’re looking around for more opportunities. You’re also keeping watch for the opposite; an upcoming sharemarket crash, a company that’s suffering and going to take a dive, government changes and financial influences that may yield a drop in the market.
A ‘passive’ long term investor gets to ignore all this ‘noise’. Through the ups and downs of the financial cycle, your carefully selected shares are slowly accruing money, and waiting until you need it in ten years’ time. Without this worry about the market, you can just relax. No stress.
Basically, long term investments mean that you are going to sleep better at night.
Takes emotion out of the equation
If you are watching the market, it can be a stressful thing; watching a share price take a dive, or knowing the market is verging on a crash. That human desire to do ‘something’ kicks in – save yourself and save your investments.
If you make decisions when you are emotional or stressed, it’s highly likely they aren’t going to be great decisions. If you set and forget – let your investments ride out the waves and troughs – they will be fine. If you sell your shares, you lose the potential gains. Keep calm, be patient.
Shares can only fall to $0. But, they can rise infinitely. And while ‘playing the game’ might mean you miss some of the losses, you also will likely miss out on some of the big ‘up’ days on the market. If you sit there and do nothing but let your investment carry on, you will make 100% of the wins.
Save money on fees
This one is a no-brainer. If you’re not involving your broker with all your buying and selling activity, there are no fees. No commission payments eating into your investments. An easy win.
What kind of investment terms should you aim for?
Investors that don’t need their money in the next few years are the perfect candidate for long term investments. This means perhaps you have a university fund for your child, or retirement savings.
A short term investment, even if it makes less money than a long term investment, does serve a purpose though. If you only have time for a short investment, it’s still likely to get a higher interest rate than putting it in a bank account. A quality short term investment is also better for those close to retirement- if you’re going to need the money sooner rather than later.
Long term investments are a far better option
If you have time up your sleeve, a long term investment is a much better option than a short term investment. Not only do you make more money, but you don’t have to spend time worrying about it. You simply invest, then rest. Knowing that you can ride out the vagaries of the financial markets with hardly a (financial) scratch is a great salve to any money worries.
Getting started
Many people are reluctant to get involved in investing because of fear. What if I invest in the wrong thing? What if the share market crashes? What if I pay too much for my shares?A long-term investment strategy goes a long way to minimising these fears. Working with an authorised financial adviser will also help you get control of these fears by creating a long time financial growth plan reflective of your goals, needs and dreams. Create a plan, stick with it and be patient. It’s not so hard (or scary) after all.
Want to get started? Contact us to take the first step.