Mahesh Pai elaborates on the advantages of long-term investing
Everyone wants to get rich quick and fast but does this generate wealth or give you short term happiness? Literate people are mostly aware of the risks that come along with ‘get rich quick schemes’ and invest in it in small amounts. Once the invested amount gets higher within a short span of time it gives them the confidence to invest more. This time their greed makes them invest a huge chunk of money without analysing the market and economic conditions and eventually some even lose the invested capital. The biggest factor of taking such irrational decisions is because of ‘FOMO’ (Fear of missing out) and wrong advice by non-finance professionals. Despite how easy digital investment management platforms have made investing, it shouldn’t be done impulsively. In fact, if you decide to enter the investing world, one thing to consider is how long you actually want to invest for, and whether you’re prepared to be in it for the long haul. As a matter of fact, sticking with your investments for a number of years could bring many advantages.
Legendary investor Warren Buffett advocates this approach when investing for the long-term: ‘Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years’. Long-term investing is likely to lead to meaningful wealth creation in the long term. Many individuals who lack the financial expertise depend on long-term investment returns to plan their financial future.
The benefits of long term investing are:
1. Compounding returns
The compounding rate of interest always works in your favour. Good long term investments work as a blessing for investors who want to reap huge profits in the future. You can also reinvest your dividend and receive compounding benefits on your principal amount. The longer you remain invested, the more time your money gets to potentially grow.
2. It takes the emotion out of the equation
Downturns can be dreadful, but the key is to manage your negative emotions well and one may consider buying at such corrections. Similarly, in an upturn, don’t get swayed if you make good gains. It may be one of the few instances in life where a less emotional approach could be beneficial, but when it comes to your finances, you might want to listen to you head and not your heart. If you are tempted to abort mission at the slightest market sneeze, it could be helpful to step back and assess the situation before you make any decisions. Staying focussed on your long-term goals could help you to avoid irrational decisions based on your emotions at the time of a market dip.
3. You will sleep better at night
Any change in the market graph will not affect your peace as it generally affects short-term investors. As a long-term investor, you do not need to worry about market fluctuations. Note that these fluctuations often make one anxious, resulting in making bad calls and wrong investment choices. However, when you are committed for the long-term, these fluctuations don’t bother you, thus giving the much-needed peace of mind. But once in a while, do look at your investment portfolio to check if you have made any investment mistakes and get it rectified with professional help.
4. Risk mitigation
When you have a short investment horizon, there could be risk of capital erosion, owing to the negative emotions at play. However, over the long term with favourable market conditions and macro-economic conditions, your market-linked investments may have the potential to grow. Risk and investment go hand-in-hand. Any investment, irrespective of how big or small it is, carries an element of risk. The risk quotient is high when you invest in asset classes such as equities. However, when you remain invested for long, the risk gets averaged out over a period of time. So long term investments have lower risk and nobody wants to put their money at risk.
5. Potentially earn higher returns
It is not always possible that you may build stupendous wealth over a short period. Hence, you must give enough time for investments to grow. And if you have made good returns, do not expect the same result at all times. You never know when another global crisis may hit or another pandemic, so plan for the worst, and hope for the best.
6. Offers tax advantages
When you constantly make buy and sell investment decisions, there are tax implications. As per current tax laws, you have to pay 10% Long-Term Capital Gains Tax if your gains are more than `1 lakh and the holding period is more than 12 months. As opposed to this, if you sell within one year, you have to pay 15% short-term capital gains tax. So, invest sensibly for the long-term whereby you save tax.
Long term investing comes with a lot of benefits and statistics don’t lie. These investments are not subject to any adjustments due to temporary market fluctuations, so patience is the key! Don’t be a sprint runner but be a marathoner. A good habit of investing regularly and systematically will instil investment discipline and hence timing the market will not be necessary. One must remember that the most difficult decision isn’t buying or selling but it is in the waiting.
The writer is an investment consultant and business coach. Email: firstname.lastname@example.org