How long should you hold a share or stock? Market expert and veteran Warren Buffett says if you do not feel comfortable owning a stock for ten year, you should not purchase it for ten minutes. The benefit of long term investing in the stock market is unparalleled, provided that investments are made in fundamentally great and strong companies with a brilliant business model, growth visibility and sound management. Staying invested in the market over the long term has historically paid off to investors.
In this article, we will be discussing long term investing and merits thereon!
Merits of Long Term Investments
Wonders of compounding:
As Albert Einstein quoted, Compounding is the 8th wonder of the world, Those who understand it earn it and those who don’t, pay it!
The lament of compounding comes into picture during long term investments when your investments produce gains through stock returns, dividends etc, they get reinvested in the stock and can earn even more. The more time you are invested in the market, the power of compounding gets more space to get larger. Your investments can grow brilliantly over time.
For instance, let’s take two investors, Rohit and Mohit, who have the same starting balance say Rs 1 lakh each. They both decide to buy the same investment on the exact same day and earn the same interest of 10%. They hold their investment for 30 years. Rohit withdraws the interest at the end of each year but mohit plans to reinvest the interest and leave it to compound.
After 30 years, Rohit who withdrew the interest will earn Rs 10,000 per year i.e.Rs 3,00,000 over 30 years. But Mohit who decided to reinvest the amount will get Rs 16,44,940 over and above his initial principal balance which is more than 5x of Rohit.
This instance explains the power of compounding. Long term investment takes advantage of the power of compounding and returns are maximized.
Requires less time:
Long term investing requires less of your time. Your work is done when you buy a stock which you think is of high quality and will maintain its competitive advantage over the coming years. All you have to do is to periodically check whether the company is performing well. Short term investing and trading requires one to give full time efforts to the same.
Most of the investors blow up a huge amount of funds in commission, various taxes and brokerage charges by continuous trading in stocks. The more you trae, the more charges are triggered. Long term investors will save on all these costs as it naturally leads you to transact less often than normal. Every rupee saved can be further added to your investment capital, which makes long term investing very powerful.
Eliminates the short term volatility out of the picture:
The stock prices may show very high volatility i.e. fluctuations in the prices in the short term but may be growing over a long term. These fluctuations tend to confuse the investors as emotions take over and lead to rough and rash decisions.
The share prices never go in one direction for too long and in continuity without any fluctuations. As you can witness in the markets, there are several downward and upward movements in the price, but looking at the larger picture the stock tends to go up. Long term investing helps investors ignore these short term volatility.
Long term investing plays because it makes you focus on material things that really matter. Long term investors will look at the core fundamentals of the entity such as performance, growth prospectus , management competency among others and not look at the daily fluctuations in the share prices.
Over the long term, privet movements tend to normalize depending on the performance of the business. Historically, these factors are very effective to predict returns in the future.
Achieving long term financial goals:
Are you saving up for your retirement, buying your house or starting a business? Long term investment is the way to go! To prepare for a high cost future, you should cut down your current costs and invest the same money for a longer time horizon. The earlier you begin, the compounding effect gets broader.
Timing the market is not required:
It is very complex for someone to predict the market for when to enter and exit consistently and accurately over various market and business cycles. You would be much better off to stay invested in the markets. Investors and Traders who try to time the market tend to underperform and barely earn gains in comparison to those who stayed in the market for a longer term.
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