The Importance and Benefits of Holding Investments Long-Term

June 14, 2022

Recent stock market downturns have proved to be disheartening to many investors, with some considering their options due to concerns of financial loss. This is largely due to the fact that it can seem difficult to know exactly how to manage your strategy in times when the market takes an unfavourable turn. However, confident investors know, time in market is more important than timing the market and holding your long-term strategy in times of uncertainty is key. 

It’s important to keep your emotions in check when making investments. Jumping ship and panic selling when the market dips can often seem like a way to cut your losses, but allowing fear to dictate your risk tolerance may in fact be doing your future finances a major disservice.

In this article we will explain the advantages of long-term investments, emotions to avoid when making investment decisions, and help you to feel more confident in your future investment choices.

Riding out the highs and lows

Stocks and shares rise and drop the most considerably within short time frames. This is why experienced Traders are able to take advantage of market volatility and sometimes make high profits from short-term investments. They know when to invest, when to sell short, and what to do in a bull or a bear market in order to yield the most profit. 

If you are a long-term investor and not a Trader, you need to learn to ride out the highs and the lows. It can be tempting to pull your investments in either situation, but taking the peaks and troughs in your stride will almost always bring you out on top eventually. 

As an example, many stock markets crashed during the height of the COVID-19 pandemic. These included markets like Dow Jones and S&P 500, who in the week of 24 February 2020 fell 11% and 12% respectively – the biggest weekly decline since the financial crash of 2008. Not only did these two markets bounce back, they rebounded to their pre-pandemic peak as quickly as May 2020.

This shows just how quickly the market can turn around, even in what is perceived to be a major crisis. 

Is this strategy right for you? Benefits of long-term investing

Multiple researchers have shown holding out on your time in the market is more likely to provide a return on investment than selling out when the market takes a downturn. While there is never a way of saying with any complete certainty that any market will turn back around after taking a tailspin, it has been proven time and again that it in fact usually does. 

Of course, you can zero out on some investments, if you’re particularly unlucky and don’t have stop-losses in place to prevent this from happening. However, if you have a diversified portfolio and keep (even just somewhat) abreast of what’s happening within the market, you will often be able to make the best turnout by holding out. 

The bottom line when it comes to investing is that it is statistically proven that the more time you hold onto your investments, the higher your return, and the less likely you are to make a loss.

The 5 main advantages of long-term investing include:

  • Reduced degree of risk. Mainly, investors are concerned about losing their money when they invest in something. But while investment values can, and often do, drop – the level of risk is considerably reduced if you have a diversified portfolio of investments, and it is far less likely for you to lose money the longer you remain invested. This is because, although past performance is not necessarily indicative of future results, history has shown that over time markets do generally rise.
  • Spend less time. Keeping on top of what’s happening in the market daily and trying to make predictions in order to secure a profit and avoid a loss can be a full time job, and is such for many “Traders”. Traders, also known as “day traders” are people who buy and sell shares over the short-term, and they often spend large amounts of time poring over charts and investment formulas. Unless you are committing yourself to a Trader lifestyle, long-term investments are a more cost and time effective option.
  • Less emotional. For the average investor who is not a Trader, watching the market consistently can be mentally, physically, and emotionally draining. Keeping your investments in the market long-term eases this emotional strain, as you can leave the investments be and forget about them for a period of time. Or, if you prefer to monitor your investments, you can be more secure in the knowledge that an investment that is performing poorly will very likely swing back around in a few years, months, or even weeks. 
  • Cost effective. Long-term investing can help you to avoid fees such as transaction costs and stamp duty. This is because it is the process of buying and selling shares that incurs these costs. Long-term investing strategies can help to avoid incurring these costs multiple times, therefore saving you money and yielding long-term returns.
  • Compounding interest. Compounding interest is a simple and effective concept. Essentially, your money gains interest, and that new money continues to gain interest: you gain interest on your interest. This accelerates the growth of your investments. While it is generally advisable that you continue to add funds to your investments over time in order to acquire higher returns, compounding interest means that even if you leave any investment for a long period of time without adding to it, you’ll likely still see significant growth.

Implications of selling or changing the long-term strategy due to fear

If a market’s trend trajectory is generally upwards (which most are), it is likely that it will continue to be so over time. That being said, all markets are subject to fluctuations and dips, and short periods of time can see drops of up to 10%, or even as high as 20%. But these are not times to panic. In fact, because many investors panic at these times, it often makes downturns in the market the best periods to invest or reinvest, as this is when stock prices drop.

The investment process is a cyclical being. The basics of how the market works is such: share prices drop people invest share prices rise again profit is gained by shareholders. Fear has a huge impact on the stock market, and many investors gain profit from the emotional investment strategy (or lack of strategy) of others. It is therefore beneficial to keep your long-term goals in mind and avoid being one of the people that panic and sell. 

Emotional side of investing

It’s important to keep your emotions in check when making investment decisions. The two main emotions that you need to monitor when evaluating where and when to invest, when to invest are fear and greed.

  1. Fear. As we have established throughout this article, allowing fear to dictate your investment process can have a negative impact on your investments and may lead to you yielding a lesser amount of return than if you were to retain your time in the market. While you should proceed with caution when making investments, panic is not a useful emotion to allow you to dictate your financial movements. Fear often leads you to sell at market bottoms. Selling at a market bottom allows other people to take advantage of the money that you could be making if you had held out and not given in to fear.
  2. Greed. A greed-based approach to investment is also detrimental, though not as much, as a fear-based one. This is because greed leads people to buy investments at market highs. Some investors assume that because a market is doing well and has a positive trajectory that it will continue to do so. This leads people to buy investments at a high price, when the market is a “bull market”. But the nature of markets is that they rise and fall, so if you’re buying high, all likelihood is that the market will dip again shortly after. While this approach won’t enable you to yield the most profits possible, it will eventually put you in a better stead than approaching investments with fear. This is because even if you buy at a market high, if you stick to a long-term approach to your investment plan, you will very likely eventually still yield good investment returns, as the market will eventually rise again. 

Speak To An Expert

The ups and downs of investing are part of the investment cycle, however if you’re looking for advice it is important to find a qualified and knowledgeable financial advisor who can provide you with the necessary tools, you’ll need to gain clarity and control over both your everyday finances and longer term wealth. 

Our team at Burcheart have years of experience helping clients with retirement planning, securing their financial future, and feeling more confident as investors, and we’d be happy to lend our expertise to you. With the right planning, advice and tools, you could be on your way to finding your financial freedom for yourself and your family.

 


 

Authorised Representative of Affinia Financial Advisers Limited ABN 13 085 335 397 AFSL No: 237857. Any advice provided in this article is general advice only. It has been prepared without taking into account your objectives, financial situation or needs. Before acting on this advice you should consider the appropriateness of the advice, having regard to your own objectives, financial situation and needs. If any products are detailed on this website, you should obtain a Product Disclosure Statement relating to the products and consider its contents before making any decisions. Where quoted, past performance is not indicative of future performance. The views and opinions expressed in this article do not necessarily reflect the views and opinions of Affinia Financial Advisers Limited. This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information. Investment Performance: Past performance is not a reliable guide to future returns as future returns may differ from and be more or less volatile than past returns

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