The following is a contribution from Mark at Think Rich Be Free. If you’re interested in contributing to Frugal Rules, please consult our guidelines and contact us.
Every individual has his or her own long-term goals and I do believe that most of them are related to life after work, which is their retirement. We all want to enjoy our retirement, right? And a good way to accomplish this is through investing.
I know that you avid Frugal Rules readers already know a lot about investing, but did you know that investing for the long run has advantages that couldn’t be enjoyed by those investing over short periods? Some of these benefits are:
Investing For the Long Run Generally Means Less Worry
Most investors that invest over short periods tend to be busier than those investing for the long run because they need to monitor their investments more often, to assure that they can make quick profits. In contrast, those that are investing for the long term are more relaxed and generally make better decisions. Long term investors are also not that affected by the market’s fluctuations. In truth, some of them may actually like it because they get a chance to buy shares for a bargain price.
Volatility measures how the price of your investment could change over time. If an investment has a high volatility, this means that its price could fluctuate, and can change drastically in just a short period of time.
Stocks are considered “risky” by most because they’re highly volatile but they are also known to give high returns. The good thing is volatility can be reduced if you invest for the long run. Studies show that investments that are held longer by an investor tend to have lower volatility than those investments that are held for shorter periods.
When it comes to investing, the ones that are subjected to tax are your capital gains. A good way to decrease the taxes that you’re going to pay is through investing for the long run. In the United States, long-term capital gains are subjected to less tax than short-term capital gains, so that those people helping a company flourish get rewarded while those just wanting to make profits through the company’s stocks don’t. (Editor’s note – a great way to lower your taxable consequence even more is by doing your trading inside an IRA account as that’ll shelter any gains from taxes for that tax year.)
Investing for a few years can provide good returns, but it can also make you vulnerable when the market is down. Investing for the long run is known to give better returns, as depicted in many charts which show the stock market’s performance over the past few decades. When you look at one of those charts you’ll see that overall, the stock market continues to rise despite having some downturns every once in a while.
A good example of this is when you invest in a good company and it continues to expand and earn through the years. Let’s use Apple, one of the world’s most well-known companies today, as an example:
If you invested on Apple, Inc. in the late 80′s where its price was less than $30, then you would certainly be making huge profits if you were going to sell it today, as one share of Apple is valued at roughly $498 as of October 15, 2013.
That’s an almost $470 price increase; imagine if you bought a thousand shares. If you were planning your retirement during those years and decided to buy shares of Apple, Inc. and held for it for awhile, you would have padded your retirement funds quite nicely.
Basically, long-term investors use the buy and hold strategy, where they’ll buy shares of companies they think can withstand the test of time. The most well-known investor to use this strategy is none other than Warren Buffett, though he is not reluctant to sell shares when things go wrong. Other investors who used this kind of strategy in the past include Benjamin Graham and Sir John Templeton.
Investing really is a long-term process that requires patience from investors. While there are still people who think investing for the long run isn’t good enough, most recognize the validity of the buy and hold strategy. Some of them have valid reasons to invest for a short period, maybe because they will need the money soon. But those people are missing the benefits that investing for the long run can give them.
So, what do you think? Is investing for the long run a good idea or not? If not, what investing strategy do you prefer?
Photo courtesy of: StockMonkeys.com