During difficult economic times such as the period we are experiencing now, it is vitally important to remind investors of the benefits of long term investment. 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?
Having an investing plan is the best way to increase the chances of success. History shows us that if this plan is looking longer term, that chance of success is even greater. The first reason is that it allows you to ride out short-term market volatility. There have been many examples of market dips over the last one hundred years. The most famous of these are the Global Financial Crisis of 2008 and Black Monday in 1987.
During these short periods, most investors would have been checking their portfolios and seeing dramatic losses. However, they are not real 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 at that point will be low. However, with equities and most other asset classes, there are far more years of positive annual returns than there are 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 10 years or more means you have far more flexibility surrounding when you take 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 then took it out in June 2015, they would be taking out £133,000 with a healthy gain of 33%. On the face of it, that looks great. Although, looking at what happened in between shows a very bumpy path to getting there. However, this does not matter because the long-term investment overcame those low periods and came out the other side, as the stock market always has.
Another reason long-term investing proves so successful is due to compound returns. This is achieving growth on not only your original investment but the gains you have made previously. Over a long period of time this can make a significant difference because your portfolio goes through a snowball effect.
Furthermore, investing long term removes the human emotion side of things. So often, it is emotions such as anxiety, doubt, worry and excitement that lead to investment decisions and these are never the correct basis on which to trade.
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 that we so often experience. However, when feeling secure in a long-term strategy, there are no decisions to be made. The only choice is to make no decision, and that can sometimes be the hardest thing to do but provides the best return on investment.
Is 5 years a long term investment
There is no firm definition as to how many years you need to invest for it 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 10 years may include 50% equity and 50% bonds and cash, a short-term investment over 3 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 investing plan, there can be ways to invest in the short-term more securely.
In summary, long-term investing strategies is 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 these is in the equity market, holding stocks and shares of companies. As equities are one of the most volatile asset classes, 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 depends on the definition of ‘best’ that is being used.
The safest of these would be stocks in the largest 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 associated with purchasing or selling property. If you frequently buy and sell properties, then the high costs could outweigh any short-term gains you have made on the value of the property. Furthermore, as an asset class, property is illiquid. This means that one cannot easily or quickly take cash out of their investment.
Looking at the alternatives, ideal short-term investments are those that are less volatile and maintain their value. An example of this would be cash because the value cannot go down, but 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 of time 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 right now?” This is a difficult question to answer as no one can predict how the entire market is going to behave, let alone individual stocks. That is why we always recommend a strategy of diversification across industries, geographical areas, and asset classes. As previously 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 risk, or the attitude towards market volatility.
Whilst one investor may feel very comfortable when the market drops 20%, another may be kept up at night worrying about their portfolio valuations. Therefore, there is no one strategy that is suited to everyone. Getting your long term investment strategy correct is finding the balance of assets that suits your attitude to risk, need to take risk and your time horizon. The best long term investments are those that suit your needs and are resilient to volatility.
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 are very aware that often life situations do not allow for 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.
Long Term investment requires the ability to build construct and maintain 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 the client to achieve their dreams. With a long term investment strategy you can make the most of investing.
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