During difficult economic times such as the one we are experiencing now, it is vitally important to remind investors of the benefits of long term investment plans. There are many investment strategies out there. Some relate to short-term investing, and others to long-term investing. This article explores why investing for the future is the best method for success.
- Why is long-term investing good?
- Is five years long-term investing?
- What is an example of a long-term investment?
- Which is the best investment long term?
Why is long-term investing good?
An investing plan is the best way to increase your chances of success. History shows us that if this plan is longer-term, the chance of success is even greater. First, it allows you to ride out short-term market volatility. There have been many examples of market dips over the last hundred years. The most famous are the Global Financial Crisis in 2008 and Black Monday in 1987.
Most investors would have checked their portfolios during these short periods and seen dramatic losses. However, they are not actual losses until they are sold. Then why would someone sell at that stage when prices are so low? There are two main reasons: either the investor has become too afraid of losing more money, or they need the money from their investments for something in their life.
Let us look at the second reason in more depth. There will always be a point when an investor needs to take money from their portfolio. There is also always a risk that the markets will be low at that point. However, with equities and most other asset classes, there are far more positive annual returns than negative years. Therefore, investing now, knowing that you will need the money in the next year, puts you at a significant risk of withdrawing the funds during a market dip. On the other hand, investing for ten years or more means you have far more flexibility when taking your money out.
FTSE 100 – 2005 to 2015
Going back to the Global Financial Crisis of 2008, the above chart shows the FTSE-100 between 2005 and 2015. If an investor put £100,000 into the FTSE 100 in June 2005 and took it out in June 2015, they would take out £133,000 with a healthy gain of 33%. On the face of it, that looks great. However, looking at what happened in between shows a bumpy path to getting there. However, this does not matter because long-term investments overcame those low periods and came out on the other side, as the stock market always does.
Another reason long-term investing proves so successful is compound returns. Compound returns involve achieving growth on your original investment and the gains you have made previously. Over a long period, this can make a significant difference because your portfolio experiences a snowball effect.
Furthermore, investing long-term removes the human emotional side of things. Emotions such as anxiety, doubt, worry, and excitement often lead to investment decisions, which are never the correct basis for trading.
When the stock market dips, many will think they can time the market and make quick gains. Others will act on fear and sell at the bottom, thus missing the fast recovery we often experience. However, no decisions can be made when feeling secure in a long-term strategy. The only choice is to make no decision, and that can sometimes be the hardest thing to do, but it provides the best return on investment.
Is five years a long-term investment
There is no firm definition of how many years you must invest to be considered long-term. 5 years or more would be long-term, but the longer you invest, the better. If investing for less than that, the best short-term investment strategy would be to reduce exposure to growth assets such as stocks and shares. Whilst a planned investment for ten years may include 50% equity and 50% bonds and cash a short-term investment over three years would be best with 25% equity and 75% bonds and cash.
This shows that although we recommend investing long-term if you have an investment plan, there can be ways to invest more securely in the short term.
In summary, long-term investing strategies are typically 5-10 years or more.
What is an example of a long-term investment?
A long-term investment could be in any asset class that is best to hold for a significant period. The most famous example of this is in the equity market, holding stocks and shares of companies. Equities are one of the most volatile asset classes, so they are best suited to holding long-term. History shows us that over the last one hundred years, equities outperformed all other asset classes, so the volatility does create opportunities for gains. The best long-term stocks to invest in depend on the definition of ‘best’ used.
The safest would be stocks in the most prominent companies, such as Apple, Amazon, Google, and Royal Dutch Shell. The bigger the company, the less volatile the stock price. On the other side, the stocks with the most potential would be smaller, younger stocks, but these come with extreme levels of volatility as there is less proven history of company success.
Property is a long-term investment.
Other long-term investments include property or bonds. Property is very well suited to investing long-term because of the high costs of purchasing or selling property. If you frequently buy and sell properties, the high costs could outweigh any short-term gains you have made on the property’s value. Furthermore, as an asset class, property is illiquid. This means one cannot easily or quickly take cash out of their investment.
Looking at the alternatives, ideal short-term investments are less volatile and maintain their value. An example of this would be cash because its value cannot go down. However, the biggest risk to cash is that it will not grow with inflation and, therefore, lose value in real terms. Although cash is not the best short-term investment, it is the most secure. Any investment into stocks, bonds, or property over a short period is considered very risky and not recommended.
Which is the best investment long-term?
We are frequently asked, “What are the best long-term stocks to buy now?” This is a difficult question as no one can predict how the entire market will behave, let alone individual stocks. We always recommend a diversification strategy across industries, geographical areas, and asset classes. As mentioned in this article, long-term investing allows you to take more risk, but this level of risk will differ for each person. No two investors are the same, whether this is the need to take risks or the attitude towards market volatility.
While one investor may feel very comfortable when the market drops 20%, another may be kept up worrying about their portfolio valuations at night. Therefore, no one strategy is suited to everyone. Correcting your long-term investment strategy is finding the balance of assets that suits your attitude to risk, your need to take risks, and your time horizon. The best long-term investments suit your needs and are resilient to volatility. Understanding your risk tolerance is crucial in developing longterm investment strategies. By aligning your asset allocation with your personal financial goals and comfort level during market fluctuations, you can create a portfolio that not only grows over time but also allows you to sleep soundly at night. Ultimately, effective longterm investment strategies will empower you to navigate market ups and downs with confidence, ensuring that your financial future remains secure.
So, should I invest long-term?
The simple answer is yes; investing long-term is the ideal scenario for the reasons detailed in this article. However, we know that life situations often do not allow this. The key to investing is to be clear on your plan and the goals you want to achieve with your money. That way, you can plan and ensure your investment strategy is aligned with your financial objectives.
To Conclude
Long-term investment requires building, constructing, and maintaining a consistent approach to investing.
At Consilium Asset Management, we take the time to explore our client’s needs and desires so that we can create a bespoke financial plan that allows them to achieve their dreams. With a long-term investment strategy, you can make the most of investing.