If investing has been something you have always held back from, perhaps out of a lack of understanding, or from a concern that you may lose your hard-earned cash, it can often be welcome news to many that there isn’t as much to worry about as you first thought. As long as you learn, be careful and have a plan in mind, investing can be quite simple. It can be full of risk, but approaching it with knowledge, understanding, and an objective makes it simpler.
Cryptocurrencies, for example, saw a raft of people invest large sums into digital coins that they believed would pave the route to riches. Only to find the very next day they were worthless. Others follow advice on TikTok or X (Twitter) believing it’s a pathway to success. Failing to realise it’s a scam attempting to lure you into a costly “members club,” where very basic, simplistic advice is offered under the guise of it being from experts.
The safest option? Use your cash your way, and invest through a managed fund from BlackRock, Allianz, Aberforth or other such companies. Or, go it alone, and invest as and where you want, following advice from actual professionals.
But do you look to the long-term? Or do you get in and get out as quickly as possible? In this blog we explain why long-term investments could be your key to success.
What is a long-term investment?
Long-term investing normally refers to investments where your funds are held for a specific period. This would normally be around five years but can be ten or more in many cases. Where short-term investments are all about timing and ensuring you go in at the right time and pull out at the right time, long-term investing is all about spending time in the market to see the funds grow. With compound growth part of the attraction, you not only stand to see your investment benefit from how the market performs, but you also see a return against the returns you put back into the investment.
Put simply, think of compound growth as gaining interest on interest, over a long period.
Those choosing to invest for the long term are often prepared to take more risks than those investing short term. A result of this is that the improvement in their investment compared to that of short-term investors is normally better. This type of investing for growth is attractive. Whilst the market may dip at times, over the long term, it will hopefully recoup those losses and improve. In a short-term investment, you don’t have the time to recoup those losses.
What are the benefits of long-term investing?
Opting for a long-term investment strategy holds many benefits over short-term investing. Of course, much depends on your individual goals. In some instances, a short-term plan may deliver the investment objectives you had set yourself. Today though, we are focusing on long-term. Long-term investing can give your money time to grow, ride out the difficulties the market encounters, and cost you less in investment fees, all attributes that can make it more appealing.
You ride out the difficulties in the market
When you invest, things can get turbulent. Investments go up and down all the time. It comes with the territory. Should you decide to pull your funds out the moment the market dips, you haven’t just lost out on paper, you’ve lost out for real as now there is no way to recoup that cash. Having it remain invested allows you to get that cash back, and even see it grow as the market rebounds. There are several examples of this and there may well be plenty more in the future. We’ve seen the Great Depression, Black Monday and many more examples where markets lost significant value in just a short period. Many investors decided to abandon ship when these crashes happened, but some didn’t. Instead, they acted wisely, and saw huge increases in the value of their stock. This is of course never a guarantee, and the caveat should always be added that investments may go up and down, and there is every chance you may not get back what you invested.
Data shows that people who invested for ten years or more during 1986-2021 had an 89% chance of seeing their investment give them a positive return.
You’ve got time for your money to grow
We mentioned compound growth earlier, and a long-term investment gives you this. Each year, you’ll hope your investment grows in value, delivering you a return. With compound growth, those returns are reinvested, growing the value of your pot, and allowing it to mature further. Think of it like this. You invest £1,000 and at the end of the year, it is worth £1,100, representing a gain of £100. This £100 is reinvested in the fund, rather than paid out to you. You’ll now get returns on £1,100 rather than £1,000. And the longer you hold the investment, the more of an investment your returns will be calculated from.
Fewer fees
Everything costs something and investing costs when you decide to buy or sell. If you keep dipping in and out on investing due to a short-term approach, you’ll pay fees each time you decide to sell up or buy in. Keeping your investment in for the long term takes away those fees, allowing you to keep more cash invested and therefore growing.
Help you to achieve financial goals
If you have set a plan to reach a magic number to either assist you in retirement, help your family with their first venture into property or so that you can upgrade the home, long-term investing is an ideal way to help. With funds invested for a set period, you can’t eat away at them and slow down the progress of reaching that goal that stands to benefit you and others. Plus, with the compounding and opportunity to benefit from market performance, you could exceed the goal considerably.
Inflation beating
Inflation has been in the news a lot recently. Long-term investments can outpace inflation resulting in your investment preserving your purchasing power over time. Especially important when the cost of living is showing no signs of becoming more affordable.
Investing for the long term may be something you approach with trepidation, that’s understandable. The benefits though stand to put you in a better position financially if you can afford to keep the money invested for more than five years. Where a short-term investment may deliver a quick gain if your timing is good, it can also deliver a quick loss. At least with long-term investing, if you do hit a loss early on, you have plenty of time for it to be recouped and turned into a profit.
As always though, seek professional advice before committing to any investment and remain aware that investments can go both up and down, and you may not always get back the amount invested.
