Investing for the long term gives your money the greatest chance of growing in value. But this means keeping calm during periods of significant stock market volatility – and remembering that, as history shows, markets typically recover.
Here are three reasons why investing over the long term is the wisest strategy.
- Time in the market matters
As the old investment adage goes, it’s time in the market – not timing the market – which is key to returns. By delaying, or cashing in your investments, you risk missing out on the best days in the market.
The global economy has endured plenty of adversity over the decades, and yet the stock market has continued to climb, given time. A financial adviser can act as a sounding board during periods of stock market volatility, and help you remain focused on your long-term financial goals.
- Compounding matters
Compounding is extremely powerful when it comes to investing. Albert Einstein described it as the eighth wonder of the world. It is, simply, earning returns on your returns.
For example, somebody earning a nominal return of 5% net of fees in year one would see their investments grow by a compounded return of 63% after ten years. After 20 years, this rises to 165%, and over 25 years it balloons to 239%. This demonstrates the cumulative effects that compounding has on capital.
- Beating inflation matters
Inflation can erode the real value of savings over time. If we assume for simplicity’s sake that your money was earning no interest at all, then an inflation rate of 2.5% would reduce the real value of £100 to £53.10 after 25 years, while an inflation rate of 5% would reduce it to just £27.74.
If you are prepared to accept the risk that comes with investing, and have time on your side, you give your money the greatest chance of growing and beating inflation over the long term.
Investing should be considered a long-term undertaking. Short-term losses can cause stress, after all no-one likes to see their portfolio go down in value. However, staying in the market and resisting the temptation to tinker can pay off in the long term.
The likelihood of making a loss should go down over time, and so too can those feelings of anxiety – particularly as you grow familiar with the natural ebb and flow of market prices.
Taking the big picture view and understanding the fundamentals of investing over several years can make one day’s volatility seem insignificant, so long as you have emergency funds in place and do not need to access the money immediately.
The value of investments, and any income from them, can fall and you may get back less than you invested. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Neither simulated nor actual past performance are reliable indicators of future performance. Information is provided only as an example and is not a recommendation to pursue a particular strategy.