Ever heard the phrase “Time in the market, over timing the market” and wondered what it actually meant? Well, this commonly used investment phrase refers to the idea that long-term investing has more benefits than regularly buying and selling stock based on the current market conditions.
If you’re thinking about investing for the short-term, take a look at these four benefits of long-term investing.
1. More time to ride out the bumps in the market
Market experts advise that stocks should be considered as a long-term investment. This is because the stock market can be extremely volatile. (It’s not uncommon for stocks to fall by +20% in value over a short period of time)
If you invest for the long-term, you have more opportunity to ride out the highs and the lows of the market. This should help you generate a better long-term return.
Let’s use the S&P 500 as an example. The S&P 500 is a market-cap-weighted index of the 500 largest US stocks. It includes large companies like Apple and Microsoft. The average annual return for the S&P 500 since it began in 1957 through to the end of 2018 was around 8%.
BUT, the stock market return for the S&P 500 index was +22% in 2017, and -4% in 2018. This market volatility shows that investing for the long-term means you’re less likely to lose money investing.
2. Your money has more time to grow
Next up we’re going to talk about a lovely little thing called Compound Interest.
Compounding is the process where your money makes you more money. The longer you invest your money, the longer that money therefore has to compound.
Here’s an example of how compounding works: You invest £10,000. You earn 5% dividends on this investment, or £500. You now have £10,500. The next year you’ll earn dividends on £10,500, so will end the year with £11,050.
Every year that your money is invested, you’ll earn more and more in compound interest. This is why many experts believe that long-term investing is the best way to build wealth.
This online calculator can help you work out compound interest.
“If you want to do better as an investor, the single most powerful thing you can do is increase your time horizon. Time is the most powerful force in investing.”The psychology of Money, 2020
3. The longer you invest, the less often you’ll pay trading fees
Every time you buy and sell an investment, you pay a trading or commission fee. If you’re constantly trading the market, you’ll be paying much higher trading fees than someone who holds their investments.
Investing for a number of years therefore means you’ll keep these fees to a minimum, which means you get to make the most of any investment returns you make.
4. You won’t be emotionally investing
If you’re following the stock market closely, constantly keeping an eye on the performance of your portfolio, you might find it difficult to separate your emotions from your investment plan.
Your emotions might make you sell during periods of economic uncertainty, especially if you’re seeing large investment losses. When it comes to investing, always play the long game and keep focussed on your financial goals. Staying invested, even when you might not want to, means you’ll be able to benefit from any potential recovery.
One way you can remove emotions from your investing decisions is to set up automatic monthly payments to your investment account. Having a set amount of money to invest each month means you’ll think clearly about where your money is going.
You might be drawn into the excitement of short-term investing, but history has shown that there are plenty of benefits to long-term investing.
Adopt a buy and hold investment strategy and not only will your investments have more time to grow, you’ll also reduce the fees over time, which gives you a greater return in the long run.
While many market experts believe that long term investing is the way forward, there are no guarantees that you’ll make gains. With all investments there is the possibility that you’ll lose money. Tax rules can also change in the future, which may impact your investment.