Being an investor is great, but long-term investing is often the best way forward.
Once you start making your money work, it can be hard not to get caught up in the daily (or even monthly) movements.
But for those that remain patient, a pot of gold awaits you down the yellow brick road. Here’s why long-term investing is a good idea and why you should consider it over a short-term strategy.
Why is long-term investing a good idea?
Here are five reasons why it can be better to invest over a longer timeframe:
1. You can afford to take more risks
You may like a little bit of risk, or you may not.
Whichever way you like to roll the dice, longer-term investing can reduce your need to get lucky.
If you have a solid investing strategy and pick companies and funds that have good long-term prospects, you can reduce the amount of risk you have to burden.
Given enough time, most strong investments will turn good. However, it can take months or years for a company to fully mature or for the market to recognise its true value.
This means that in the short-term, your investments may suffer some losses. But over a longer period of time, your portfolio can develop like a fine wine.
You can also afford to make riskier investments into things like long-term growth stocks or cryptocurrency, without panicking every time markets move. Even if some investments do not pan out, giving yourself lots of time will give you plenty of opportunities to make better investments.
2. Riding out any temporary market bumps
This follows on from the risk aspect. Having time on your side means that you can ride out any inevitable market corrections that take place.
Investing can feel like a roller coaster. But setting yourself up with long-term goals means that the majority of short-term ups and downs won’t really impact you.
Stay patient and potentially keep an eye out for any good buying opportunities.
If you’re unsure about an investment during turbulent times, ask yourself one simple question:
“Do you think the value of that investment will be higher in five years time that it is today?”
This should give you all the reassurance you need.
3. Reduce your tax liabilities
With most forms of investing, when you trade and sell investments, you often incur tax liabilities.
This can be in the form of capital gains tax (CGT) or similar taxes.
By investing for the long-term, you can reduce the number of transactions you make and plan your taxes better.
Having a decent number of years to invest also means that you can make the most of your yearly stocks and shares ISA allowance and utilise your zero-rate CGT band each year.
4. Plough through any economic downturns
During a major recession or economic crash, the media will make it seem like civilisation is falling apart.
Sure, a big crash can turn all your hard work into peanuts. But it’s just temporary.
Things will get better given enough time. If you’re investing for the long term, you have the benefit of being able to just keep on trucking.
Short-term traders and investors constantly have to worry about what’s around the corner. By giving yourself enough breathing room, you can ensure that your investments have ample time to recover should the worst happen.
Downturns and crashes are a part of the economy. It may feel like the end of the world, but it’s not.
5. Less stress and easier to manage
There’s nothing worse than checking your portfolio and seeing a loss.
But it’s important to remember it is just a paper loss. You haven’t actually lost any money (unless you sell the underlying investments).
So the best thing to do is ignore most market movements. If you’re a long term investor and don’t plan on using your investments for years, what’s the point checking on things daily?
Doing this will just invite unnecessary stress into your life and potentially encourage you to make rash investment decisions that could harm your investing strategy.
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