The power of a long-term investment strategy

Long-term investing

In today’s fast-paced financial landscape, where instant gratification often takes precedence, adopting a long-term investment mindset can be challenging. But, by cultivating the discipline to weather short-term market fluctuations, investors can tap into the power of compounding, allowing their investments to grow over time. Further, a long-term investment outlook helps foster resilience and build composure when uncertainty abounds. In this article, we explore these – and other – benefits associated with taking a long-term investment view.

Riding out market fluctations: Knowing that you’re invested for the long-term helps you to ride out market fluctuations that are endemic to the environment. Historical data is clear: over the long-term, markets move in an upward trajectory and while markets may fall, they always bounce back. If you exit the markets in a downturn, you effectively lock in your losses – whereas if you remain invested even when markets drop, you stand to benefit when the tide inevitably turns. While the value of shares can drop significantly over the short term, equities tend to deliver higher returns over the long-term, despite financial setbacks. Again, historical data shows that markets never go in one direction continuously but fluctuate in response to economic, political and global events such as we’re bound to encounter in 2024.

Compounding interest: The longer you remain invested, the longer your money has to grow as a result of the exponential effects of compounding. Further, taking a long-term view gives one more opportunity to reinvest your profits which in turn increases the potential for further profit – keeping in mind that reinvesting your returns (rather than cashing them in) means harnessing the power of compounding which ramps up the longer you keep doing so.

Less time and skill required: Long-term investing involves less time but more patience in that it often requires the investor to do nothing at all which requires less skill. If you’ve sought advice and implemented a long-term investment strategy, then the extent of your involvement should be a quarterly or annual review of your portfolio to ensure that it remains aligned with your goals. As Peter Lynch once famously said, ‘Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.

Emotional control: Humans are emotional beings which is a good thing, except in the context of investing. Market volatility can lead us to make irrational decisions based on greed and fear rather than on logic which, in turn, can erode our investment returns. While most investors intuitively know that they should remain invested when the markets drop, many succumb to their emotions and sell out instead – thereby locking in their losses, interrupting the process of compounding, and placing themselves at risk of poor market timing. On the other hand, those invested for the long-term can reap the benefits of removing their emotions from their decision-making and staying focused on their long-term goals.

More favourable investment returns: From decades of historical data, we know that equities have outperformed all other asset classes and that equity investors have experienced a much higher rate of success over the longer-term. Remember, the lowest that the value of any share can fall is to R0, but the extent to which the value of the share can rise is infinite. By committing yourself to a well-diversified investment strategy that is designed with a specific goal in mind, you increase your chances of maximising your returns over the long-term.

No market timing: Investors are notoriously poor market timers, largely because most investment decisions are driven by emotions. Steering clear of market timing means reducing investment risk by removing the potential for lost opportunities and ensuring that you are invested for the good days. Research is clear: most investors who try to time the markets underperform against those who stick to their long-term investment strategy. 

Remaining goal-focused: Goalsetting is an effective part of long-term investing because it allows you to set emotions aside and focus on a pre-determined set of financial goals. When constructing your investment portfolio, be sure to identify a realistic time horizon for each goal and then structure your portfolio in accordance with that time frame. Focusing on your goals will help to filter out the short-term noise and focus on the longer-term objectives. 

Peace of mind: A significant benefit of being a long-term investor is that your emotions are not linked to share prices. Without the need to track indexes and market movements on a daily basis, long-term investors create time and emotional space to focus on the important things such as family and friends, career, lifestyle goals, physical well-being and continuous education. If your long-term investment strategy is aligned with your propensity for risk, that your portfolio should not be exposed to more risk that you are emotionally capable of handling.

Outstripping inflation: Investing towards a long-term goal generally means that you are able to take more investment risk, with a greater share of your portfolio allocated to growth assets. It is common knowledge that when it comes to investing, the greater the risk, the greater the reward. With higher expected returns over the longer-term, investors have a better chance of increasing the purchasing power of their money by outpacing inflation. Investing appropriately over a longer period of time will therefore reduce the risk that inflation presents to your invested capital.

Cultivating a long-term investment mindset not only helps create wealth but also fosters emotional resilience amidst market fluctuations. By focusing on patience over impulsivity and foresight over short-term gains, investors can gear their investments for robust returns over the long-term.

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