There are many advantages to long term investing. New taxes. New policies. New governments. New corporate mergers. Don’t look now, but the domestic and international fabric is constantly being rewoven, and it should be a wake-up call for all investors. With the ever-increasing pace of world events, economic change and dynamic legislative reform, it’s little wonder that many investors have lost a sense of perspective and of proportion, and an understanding that investing is a long-term economic process rather than a series of short-term events or reactions to events.
It is important for today’s investors to return to farsighted investing that promises the greatest long term rewards, in the stock market, in bonds, in insurance products, and in other investments that historically have proven their value over the long term.
At the same time, investing should be understood not in the context of the far simpler world of 10 or even five years ago, but in the context of the global economic realities we confront.
Advantages of Long Term Investing
Today’s long term investors who take the long view reap the rewards of many significant long term advantages. For example, the long view tends to smooth out the short term fluctuations and cycles of the financial markets. Long-term investors profit from long-term trends, which have generally been positive for stocks, bonds, insurance products and many other investments.
Continuous and periodic investing over the long term also helps reduce much of the risk associated with investing. Techniques such as dollar cost averaging (investing fixed dollar amounts at periodic intervals, regardless of fluctuations in price) help investors exercise the discipline required by long term investing.
Further, for those investments that pay interest or dividends now or in the future, the positive effects of compounding escalate with time. As interest and dividends are reinvested, they generate more and more income at an ever-increasing rate. Long term investments can help alleviate the eroding effects of inflation when the combination of capital gains and income grow at a rate that exceeds the rate of inflation.
And, the psychological benefits of long-term investing are substantial. Investors with the long view are not panicked by short-term declines, nor are they overly zealous about sudden gains. Instead, the long view places these events in their proper perspective.
Trading is Not Investing
Advantages such as these are convincing evidence that investors who appreciate the longterm perspective are more likely to build true and lasting wealth over time. But it is essential to understand the difference between investing and trading.
Buying an investment product is not necessarily investing. Investing, in the traditional sense, entails holding an investment for the long term. Buying an investment and then selling it for a short term profit or loss is better defined as trading. All investors should realize that trading and investing are different.
With the market’s recent increased volatility, many investors have taken short-term gains and now confuse the two. To their detriment, these investors lost the sense of perspective and proportion that defines investing as a long-term economic process.
People who know how to invest long term buy stock in a company to be an owner. Traders, in effect, rent stocks for short term gains. However, this does not mean that trading is bad. Trading for short-term gains is a valid strategy for those who are willing to accept the risks and understand that it is not investing.
Monitor Your Investments
Maintaining the long-term perspective does not mean buying an investment and then forgetting about it. Rather, successful long term investors must monitor their investments and their financial goals regularly. Your financial objectives will change over time owing to milestones such as marriage, children, career developments or retirement. You must reassess your goals periodically and make corresponding changes to your investment strategies.
Similarly, the long-term prospects of financial markets and economies may change fundamentally over the long term. The only way to stay abreast of these kinds of changes is, with the help of your investment professional, to monitor your investments continually as well as the markets and economies in which they operate.