When it comes to investing your hard-earned money for the future, patience is a value that can have no monetary figure attached to it. Sometimes it is difficult for individuals to understand and appreciate the value of long-term investments compared to the potential for quick returns on short-term trades. However, before pursuing a course of short term trading, consider these five reasons to stick it out for the long run.
The greatest advantage to long term investing is the ability for your money to grow with compound interest. Using the rule of 72, it is estimated that most long-term investments will double in nine years. That works out, using a reasonable long-term rate of 8%, by dividing 72 by the growth rate, and your money is going to double (on average) in just nine years.
On top of the numbers, there is the logic behind long term investing. First and foremost, it gives you and your financial advisor the ability to stay ahead of trouble in the market by making small tweaks to your portfolio here and there, rather than relying on knee-jerk reactions as the market fluctuates. Secondly, and building upon that first point, is the fact that long-term investments are better insulated from booms and busts in the market.
Convenience of Passive Investments
As if compound interest wasn't a good enough reason, long-term investments are simple passive investments. This means that you have the ability to act proactively as it regards your financial future, rather than reacting with panic every time the market fluctuates wildly one direction or the other.
Investment risk drops significantly when you focus on long-term strategies over short-term movements. It cites the growth a 20-year investment in the S&P 500 would have netted investors between 1993 and 2013, a total of 483% growth. If you invested short term instead, and missed even the 10 biggest days in that 20-year period, your growth would have been cut to just 191%. If you missed the 20 biggest days over that same period, your growth shrank all the way to just 20%.
Time to Fix Errors
Everyone makes investment mistakes here and there. While short-term trades leave you wide open to big losses when you make a mistake, long-term investments provide an easier route to fixing your errors. For example, just because a company you're invested heavily in has a bad quarter or even bad year, doesn't mean it won't grow in the future. Company stocks or portfolios with a long tradition of steady growth are easier to invest in long term, rather than trying to guess when to buy in and cash out.
Reward of Stock Dividends
Last but not least, long term investing can come with the added benefit of stock dividends. On top of growth in stock values that puts more money in your portfolios for the future, you'll receive dividend payments in many cases that provide you with an additional reward. In some cases, this can even provide a buffer on investments with poor returns on stock prices alone.
As always, it is a good idea to consult with a qualified financial advisor before making any decisions. Contact Richard L. Farrar, CFP®, CLU®, ChFC®, AEP, Private Wealth Advisor, today for guidance executing your financial plan. Just remember, slow and steady wins the race!
These are the views of Social Advisors, and not necessarily those of the named representative, Broker dealer or Investment Advisor, and should not be construed as investment advice. Neither the named representative nor the named Broker dealer or Investment Advisor gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your financial advisor for further information.
Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Richard L Farrar is a registered representative of Lincoln Financial Advisors Corp. Securities offered through Lincoln Financial Advisors Corp., a broker/dealer (Member SIPC). Investment advisory services offered through Sagemark Consulting, a division of Lincoln Financial Advisors, a registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies. CRN-1370517-120915