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Understand the boons associated with long-term investments such that you too can consider availing them.
Understanding Long-Term Investments
Have you ever thought of holding onto an investment for the long term? This essentially means that you must hold onto the security in question for a period that exceeds a year. This asset could exist in the form of stocks, mutual funds, exchange-traded funds (or ETFs) or bonds among others.
Characteristic Traits Needed by Long-Term Investors - Should you opt for a long-term investment, you must approach your asset with discipline and be willing to commit the time. Patience, therefore, is a virtue in this regard. This is owed to the fact that you must be prepared to expose yourself to a certain degree of risk while you wait for your investments to accrue greater returns over time.
Volatility vs. Returns – A large number of market experts are of the opinion that stocks ought to be held over the long term. To understand where they are coming from, consider the past 47 years of the S&P 500. Of these, losses were only incurred in 11 years. This resulted in stock market returns being fairly volatile over shorter time frames. That said, from a historical point of view, investors have experienced a far greater rate of success over longer time frames.
Overlooking Short-Term Returns – While low-interest-rate scenarios may entice you to go for stocks such that you can enhance your short-term returns, you should be patient. Not only does it make more sense to hold stocks for the long-term, but it provides you with greater overall returns.
Continue reading to understand each of the benefits associated with long-term investments.
Benefits of Long-Term Investments
Each of the points listed below highlights the virtues associated with these investments.
Superior Long-Term Returns
When looking at the term asset-class, one thinks of a certain category of investments. All investments that fall under a single asset class are characterized by the same qualities and traits. For example, stocks that constitute equities or fixed-income assets (i.e., bonds). A number of factors help determine what asset class is best for you. These factors include the following.
- Age
- Threshold for risk
- Investment goals
- Capital at your disposal
Among these asset classes, for a long-term investment, stocks have ordinarily outperformed all other asset classes when looking at several decades worth of their returns. The Sensex in India for instance, stood at a value of 549.43 when it closed on its first day of trading in 1986. Fast forward to June 2022, wherein it closed at 51,360.42. Its compound annual growth rate (or CAGR) has returned a whopping 15 per cent in the past 40-odd years.
While emerging markets bring with them some of the biggest return potentials within the equity markets, they are also tethered to the most risk. This class has historically accrued high average annual returns. That said, fluctuations over the short term have impacted performance.
It’s Possible to Ride Out the Rises and the Dips
Stocks are often viewed as some of the better long-term investments. This is owed to the fact that it isn’t out of the ordinary for stocks to dip 10 to 20 per cent if not more in value over short time frames. Investors are presented with the opportunity to sit through the highs and lows over the course of several years if not decades such that they can accrue potentially superior long-term returns.
The value of stocks as long-term investments isn’t limited to India alone but applies to the global stock markets. If you look at the S&P 500, for instance, it’s been rare for people to lose money investing in it for a period of 2 decades. This holds true despite setbacks in the form of the financial crisis, the tech bubble, and the Great Depression. Had investors made an investment in this index and held it for an uninterrupted period of 20 years, they would have experienced gains.
Market Timing is not Investors’ Strong Suit
Human emotion is incapable of keeping us as calm and rational as we’d like to be. This emotion, therefore, serves as our Achilles heel. While a number of investors claim to be long-term investors, the moment stock markets begin to dip, said investors tend to withdraw their money to prevent additional losses from arising.
Several investors aren’t able to remain invested in stocks when a resurge transpires. Further, they only dip their toes back in once a large chunk of the gains have already been achieved. By partaking in buy high, sell low behaviour, investor returns are eaten into majorly.
Factors that impact this behaviour include the following.
- Fear of Regret – It isn’t unusual for people to not trust their own judgment and instead focus on the hype. This holds particularly true once markets dip. This bait is often fallen for as people feel they’ll lose ample money owing to stocks dipping so they sell said stocks to allay those fears.
- Pessimistic Feelings After Change – While optimistic sentiments are high while the market rallies, once it dips, emotions sour. While the market may experience fluctuations owing to short-term shocks, it is important to bear in mind that these issues are often short-lived and the chances of things returning are always high.
Long-Term Investments are More Affordable
One of the key benefits of long-term investments is that they are more affordable. It is cheaper to keep stocks in your portfolio over the long term rather than buying and selling them as the longer all investments are held by you, the fewer fees need to be paid.
Power of Compounding via Dividend Stocks
Blue chips often distribute corporate profits in the form of dividends that are paid fairly regularly to eligible shareholders. Although there’s always the temptation to cash them out, by reinvesting them into the companies that pay them you stand to accrue potentially greater returns over the long run owing to the power of compounding.
Also Read: Best Long Term Stocks to Invest
Final Thoughts
Long-term investments are viable for a number of reasons, only some of which have been outlined above. Learn more about all that they entail on the Angel One website today.
Disclaimer: This blog is exclusively for educational purposes and does not provide any advice/tips on investment or recommend buying and selling any stock.
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