When it comes to investing, there are all sorts of paths to follow, but one of the most important decisions you have to make is your investment horizon. Long-term investing offers numerous advantages that short-term investing or day trading cannot provide you with. Moreover, by taking the longer view, you have more time to effectively diversify your portfolio and capitalise on the market fluctuations, when required.
In fact, long-term investing endorses the ability to maintain positions through difficult times. As a long-term investor, you should seek out for companies with a proven record of growth as well as consistency in dividend payments. These type of companies are more likely to continue delivering shareholder value in the coming quarters, and deliver dividend growth in the long-term. This will offer you the option to identify opportunities that can generate long-term portfolio growth and provide you with higher earnings, at least for as long as the dividends are increasing. In this article, we are going to see all the advantages of being a long-term investor.
In the current uncertain environment, where the global financial markets may fluctuate like crazy from one day to another, a 10% decline in the market could be disastrous for a short-term portfolio. However, if your investment horizon is 10 to 30 years, even a sharp decline of the market won’t affect your portfolio return. In fact, market fluctuations offer you the option to diversify your portfolio and capitalize on stocks that may perform better, even during unfavorable market conditions. In that way, long-term investing protects you from being at the mercy of the stock market.
When seeking for long-term growth, you are actually seeking to maximise returns through effective asset allocation, but also through reinvesting your profits to generate even higher growth. Compounding allows you to generate additional earnings from existing earnings by reinvesting the dividends to purchase additional shares of stock.
For example, if you reinvest a dividend at 3% in a long-term horizon, let’s say 25 years, for a starting principal of $20,000, you get a new principal of $42,300, which is an 111.5% return and an annual dividend income of $1,269. Instead, for an investment horizon of 12 months, your new principal will be $20,608, which is a 3.04% return and the annual dividend will be $618. Obviously, long-term investing can make a huge difference in the generated returns.
Every time you sell a stock in the market, you are subject to taxes on the capital gains generated from that sale. So, imagine that if you do that on short-term investing or day trading, the taxes you will be subject to will be much higher. With long-term investing you are exposed to much less taxation because long-term capital gains (i.e. gains derived from investments held for more than one year) are taxed at a lower rate, normally a flat 15%. Therefore, as you continue to grow your portfolio and holding profitable stocks in the long-term, you are subject to lower tax liabilities, which, in return, allows your money to compound.
The more trades you make the more money you are obliged to pay in commissions. Even if you are using an online trader who charges lower fees per trade, still commissions can eat up a significant portion of your portfolio. Long-term investing comes with fewer commission fees because you don’t have to trade every day, thereby significantly lowering the total commission expenses.
Long-term investing requires some research related to the stocks you are going to select for your long-term portfolio. This means that you spend some time in the beginning when deciding your initial investment, but then you can forget about day-to-day trading or following the market on a daily basis.
Perhaps the most important advantage of being a long-term investor is that you can sleep better at night. There is no need to wake up early in the morning or sleep late at night in order to follow the markets and check if your portfolio has incurred significant losses or growth overnight. As a long-term investor, you are investing in growth-oriented, dividend-paying stocks, so, even if they are volatile, their price fluctuation will be relatively low, thus keeping your stress levels low.
To sum up, long-term investing is easy to do, even for novice investors. It doesn’t take a highly-experienced investor to create a long-term portfolio of winning stocks and hang on to them for 10 or 30 years. Even if you miss several trades, it’s not the end of the world. A long-term investment horizon allows you to implement different trading styles and capitalize on diversified investment opportunities derived from relatively stable companies. Once you realize a substantial change in a company, you have the option to replace its stock with a more growth-oriented one. In fact, long-term investing allows you to adjust your strategy according to the market, but you are exposed to lower fees and you don’t have to watch every little fluctuation of the market.
For those of you who are willing to explore long-term investing further, you can check historical data. For example, from 1926 to 2014, all four asset classes in the long-term investing outperformed their short-term peers. This happens because, although there is 50% probability of rising and 50% probability of falling, stocks can never fall under $0, but they can rise more than 100%.
Thereby, aligning your portfolio for the long-term gives you more chances of making money. You can also calculate your portfolio return with compounding dividend investing or you can check how tax-efficient investing works to better understand how to manage your portfolio in order to minimise your tax burden.
Long-term investing does not guarantee success, but it can definitely grow your portfolio. The main reasons to expect it to succeed is because global markets are dominated by short-term investors, but this doesn’t mean that long-term dividend investing is dead.
Now that you know that you don’t have to sweat the small stuff, would you agree that long-term investing is worth trying?