Why You Should Focus on Long Term Investing and Not Short Term

When it comes to investments as a way of achieving financial stability, there are lots of investment portfolios with promising profits to look up to. A recent study revealed that there are over 7000 stock investments, each of which has its advantages and disadvantages. However, of all these different types of investment, the best type investors are often advised to embark on is the long-term investment. This is basically because for an investor to yield his or her desired wealth from an investment, it takes a while for the money to grow. While the money is growing the investor has a lot of opportunities to make more money with the profit generated from the investment. Investing in long-term portfolios is a way to not just allow that money to grow but also benefit from the numerous opportunities to increase profit on investment. 

What Is A Long-term Investment?

A long-term investment is a type of investment that takes a long period of time to be sold. It is not like the short-term investment that is usually cashed out within 6 months to 5 years of investment. Long time investment can take more than 20 or 30 years to cash out. These types of investments are not limited to stocks alone. They can also include dividends, mutual funds and, real estate. While the dividend is not a type of investment, it is used to categorize investments that pay a dividend 

Reasons To Invest In Long-term Investment

• Long Term Investment Performs Better Than A Short-term Investment.

One of the reasons you should invest in long time investment is that it performs generally better in the stock market. As a long-term investor, history is on your side. Most of the studies carried out to evaluate the best types of investment revealed that long-term investments perform far better than a short-term investment. A good example is S&P 500. Over a period of 20-years, the S&P 500 has always recorded a positive return irrespective of the time of investing. This shows that for investment with a time frame of 20 years there is a great tendency that the profit would be higher than an investment with a time frame of 2 or 5 years.  A study was carried out to examine how the two types of investment response to market volatility and their payout, the result shows that the average return of S&P 500 for 87 years starting from 1928 to 2015 is 9.5% per year. This compares favorably to the 3.5% return of three-month Treasury bills and the 5% return of 10-year Treasury notes.

• Short-term Investment Is Volatile Than A Long-term Investment.

There are lots of market experts that have suggested that long term investment pays far better than short term investment. According to record, for the past 40 years, The Standard & Poor's (S&P) 500 Index has experienced losses in only 10 from 1975 to 2015. This shows that the stock market is volatile in a shorter time frame.  More about market volatility would be explained in the benefits of long term investments.

Ten Advantages Of Long-term Investment

• Compounding

One of the major advantages of long term investment is the availability of compounding. This simply means the process of reinvesting earnings derived from the current investment. That is, reinvesting profits from stocks. While compounding is closely related to diversification, it is different from diversification. 

Compounding works mainly for long term investment. The proceeds from the current investment get reinvested and this practice continues until when the investor decides to sell his or her investment. In most cases, the profit from the reinvested stocks often supersedes that of the primary stock. Compounding continues to increase or occur the more the investor allows the investment to grow. This means that the longer the time frame, the higher the profit made from compounding. 

However, while long term investment allows you to benefit from compounding, compounding is not limited to investing your profit alone. It also could include investing money gotten from the dividend. Compounding as already explained is a practice in which profit generated from investment is reinvested back to the stock and allowed to grow and yield more profit. The benefit of compounding is that you generate from the primary stock and from the new stock which you invested in. Also, compounding is something that occurs over and over again as long as the investment lasts. This implies that with your reinvested profit, your wealth keeps growing. This is one of the reasons, long-term investment is the best form of investment to engage in. 

• Diversification

This is a very unique benefit of long term investment. Diversification is a means of spreading your investment around other available portfolios to avoid the effect of price volatility on your investment. Having several long term investment portfolios guarantees that your entire investment stays profitable. Also if one of the stock falls as a result of market volatility, your entire investment would not be affected. The long-term diversity of portfolio ensures that your money stays sheltered 

Diversification is used to reduce risk and to maximize the return from the various available investment opportunities. However to be able to benefit from diversification the investment is expected to be a long term one. It is one of the ways most successful investors make their money. Diversification is one of the unique benefits of operating a long term investment.

• Dividend

This is another benefit of the longterm investment. Long-term investment does not necessarily mean you would be entirely cut out from getting any money from the investment, you can receive a small chunk of your money at regular intervals in the form of a dividend.  This regular dividend from stock and mutual funds could be a monthly payment, a quarterly payment or six months payment. The benefit of dividend income in long-term investment is that it is generally tax-free. Money generated through dividends can also be reinvested in the form of compounding. 

However, it is important to note that not all longterm stocks pay a dividend. Among the best paying dividend investment include Vanguard High Dividend Yield Index Fund (VHDYX), Vanguard Dividend Appreciation Index Fund (VDAIX), Columbia Dividend Opportunity Fund (INUTX), Vanguard Dividend Growth Fund (VDIGX), T. Rowe Price Dividend Growth Fund (PRDGX),  Federated Strategic Value Dividend Fund (SVAAX), and Neuberger Berman Equity Income Fund (NBHAX)

Money generated from dividends can be reinvested into the stock, giving rise to the appreciation of stock price. Also, the invested dividend can also benefit from compounding. 

• Long-term Investment Helps You To Control Your Emotion

Long-term investment, unlike short-term investment, helps you to manage your emotions. This implies that unlike short-term investment where you can easily give in to your emotional response to the rise and fall of the prices of stocks, your response to long-term investment is usually not as intense as the short term investment. Unlike short term investment where at any slightest drop or rise in the price of a stock, you are tempted to start calculating your profit, you don't get agitated and run to calculating your gain at a 10% jump or fall in long-term investment. Also while a fall in the price of the stock in short-term investment might make you sell off your investment to avoid further loss, long term investment allows you to focus on the meats and potatoes of your investment while looking forward to the overall profit of the investment.

For instance, let's observe a 10 years period of investment from 2010-2020. Let's also assume that is a decline in the stock market by 49.29%. For an investor who had invested for 10 years and courageously maintain this time frame, he or she would realize an average annual return of 6.38%, adding up to a total of $1,856. However, for an investor who invested $1,000 but missed out the best 10 days of investment, he or she would earn $938, making a loss of 6.2% in value. This analysis supports the popular saying in investment that successful investment is more about time than timing.

• Long Term Investment Is Usually Less Affected By Tax Payment Like A Short-term Investment 

If you are an active long term investor, you will pay less tax than you do as a short-term investor. For short term investment of one year or lesser, the investor would have to pay top marginal tax rate starting anywhere from 10% to 39%. However, for long term investors, the task range is usually from 0% to a maximum of 20%. Although, most times, the investor does not pay up to 20%. 

• The Long Term Investment Is Not Tied Down By A 10% Commission Price.

This means that in long term investment, payment of commission is generally reduced. As a long term investor, you are not bothered by the incessant 10% commission price like the short term investor. Commissions in long-term investment is an afterthought.

• Investment Risk Is Generally Reduce

Long-term investments are generally easy to operate, with less expensive tax payment and minimum risk. Risk in long term investment is reduced to the barest minimum. Usually, the risk faced by investors in long term investment is the market risk or systematic risk. This type of risk cuts across every company and investment irrespective of whether it is long-term or short-term. The common cause of systematic investment is political instability, inflation rate, interest rate, exchange rate, and war. Since the risk is not limited to a particular company or investment, it is a risk every investor must confront.

• Long Term Investment Generally Benefit From Reduced Market Volatility

The major benefit of long term investment is found in the relationship and differences between time and volatility. The simplest definition of volatility is a swing in market price. It measures the degree at which prices change over time. Since volatility deals with the price of stocks over time, it means the higher the volatility of a stock, the higher the price of such stock. Investment portfolios with unstable prices are usually very risky and might not do well in the stock market. With long term investment, the price of a stock might constantly change but end up maintaining a stable pattern of growth. However, in a case where the stock is affected by market volatility is a short-term stock, it affects the emotion of the investor and often leads such investors into selling off the stock. 

Therefore, long term investment tends to have lower volatility than short term investment. The longer your investment stays, the more you would be able to weather a low market period. Assets with higher short-term volatility risk (such as stocks) tend to have higher returns over the long term than less volatile assets such as money markets.

• Long-term Investment Saves You From A Harsh Market Decision

This means that long term investment helps save you from yourself. This point is similar to being controlled by your emotions. One of the rash decisions associated with short-term investment is selling off stock as a result of market volatility. However, since you are already committed to a long term investment, selling off investment would not be a decision instigated by emotion like the short term investment.

Long term investments are generally less costly to run than short-term investment 

Long-term investing would have you from expenses such as transaction costs from active trading. There is a tendency that if you hold your shares for the long term, certain mutual funds may defer sales charges.

• You Can Easily Correct Your Mistakes.

With the long-term investment, it is very easy to correct your mistakes. Perhaps during the period of your stock, you realize that there are some companies that have demonstrated strong growth, you can easily reinvest your profit into these companies. By making this little change, it affects the profits of your investment tremendously. Long-term investments allow you to correct some or all of your mistakes. It gives room to learn, apply what you have learned and grow.

Summary

Long-term investments are the best type of investment compared to short term investments. It is packed with a lot of benefits and opportunities. However, once you decide to become a long term investor, your choice of investment would depend on your risk tolerance and the expected return from the investment. Also, before engaging in long-term investment, it is also important to note that there are also some drawbacks in long term investment, these drawbacks include increased business risk and limited liquidity.