Have you tried grabbing the egg of an ostrich while its mother’s around? Stupid move, right. Let me propose another idea instead. “Simply wait”. Believe me; this attribute can make you rich in the stock markets as well. Investments made for long term carry numerous advantages than those made for the short term.
Withdrawing investments midway would simply tamper its ability and ultimately stop it from reaching its fullest potential.
Differences between short term and long term investment
Any investments that you make will fall under either long term investments or short term investments, based on the time period you stay invested for.
Investments are similar to the seeds that you sow. It had to be given enough time to grow. Only then can we taste and cherish what the fruits had to offer. A perfect seed will result in a strong tree and delicious fruits irrespective of the tough storms and nasty winds. Further, short term and long term investors differ in the following ways
|Particulars||Long term||Short term|
|Objective||Long term investors try to address their long term investment objectives like child’ marriage, retirement, etc.||These investors try to satisfy the financial needs that arise over a year or less. It might include buying a new car, spending on vacation and so on.|
|Volatile||In the long term, you can eliminate fluctuations and volatility to a certain extent.||The markets are extremely volatile in the short term. There is also a risk of reduction in the purchasing power of the value invested.|
Quickly hop in to understand about the benefits it would be offering. Here you go,
Reasons to invest in the long term stocks
- Eliminates emotion off the equation
Emotion is your worst enemy when it comes to stock markets. A person who operates based on emotion is sure to meet a dead end. Even people who are quite established in this field might easily fall prey to their emotions. Hence, keeping them intact is essential. When you are investing in the long term, you will be free from any emotional interference. Small and temporary changes will not affect your decisions.
Say in a particular month the stock market saw a 10% fall. A short term investor might panic. During such circumstances, emotion easily kicks in. Fear and greed might cause us to make the wrong call. This might not affect a person who is going to be invested for a period of 2 years. He will hold onto patience and remain collected. Thus, you can peacefully go to bed without panicking about the money you invested.
- The longer the better
Compounding works effectively and to your advantage only when the sum is held for a longer-term. Therefore, your returns will be far better than anyone who is trading for the short term. Equities bring great returns provided that you allow your investment the time to grow and realize its fullest potential. It is proven historically that when you choose the right stock and stay invested for a longer period, the returns you will be fetching will be as high as 14%. Further, the returns in the short term won’t be sufficient to cope with the growing inflation. That is, there is a high chance that you may be losing your purchasing power.
- Enough time to offset the losses
Mr. X made an equal investment in two schemes. One for a short term based goal and the other for a long term based one. A sudden market crash leads him towards a great loss. His long term investment can be adjusted, and the losses incurred can be met over the next few years. But the same is not the case with short term investment because the investment period is less. Hence the risk is comparatively lesser in the long run than that of the short run.
- It is anyone’s game
As said earlier, in the short run, the market is highly volatile. Even a small movement can bring you a great loss or vice versa. You should be extremely cautious while operating in the short term. Hence, only a person who has enough experience and sufficient knowledge can withstand such conditions. You will need to keep track of every market movement and that of the economy as there is only a thin line between making profits and encountering losses. Hence a small mistake might cost you more than you can think of.
But when it comes to the long run, you don’t have to be an expert. Even a newbie can make profits when it comes to long term investing. Historically, the people who invested in a longer period gained 90% of the time. So even if you are a passive investor, the chances of you making a profit are quite high.
- Other benefits
Apart from that, there are a few other benefits as well:
- You can make any changes in your portfolio, such as systematically increasing the investment, decreasing the investment, etc. The same will be a little restricted under short term investment. You can also balance and rebalance your investments as and according to the time and market conditions and ultimately lay the road for getting maximum benefits.
- Long term investments are the best way for wealth creation. Anyone looking to build a stable financial base should go for long term investments.
- It protects the capital even if the returns aren’t huge. But in the short term, there is a high chance of meeting with severe losses. A person who has high ignorance towards risk must go for long term securities than its counterpart.
- Tax rebates are also offered for long term investments when compared to the short term. Sometimes the taxes you will have to pay might eat up your gains, which is eliminated in the longer run.
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Long term investment options
Equity stocks are the best source if you are looking for a good return. Though risky, they will have adequate growth over a period of time, fetching your expected returns. For those looking for a tax saving option equity-linked savings scheme (ELSS), mutual funds that offer tax rebates are good alternatives.
- Tax-free retirement plans
Securities like EPF and PPF are famously sorting after by such people who look out for low risk-based assets. The assets generate a return of roughly 7-8%. These funds and investments get tax concessions under Section 80. EPF allows periodic withdrawals of the deposited amount. PPF, on the other hand, is a good investment platform but has a lock-in period of roughly 15 years, which might look like a very long duration.
- Bonds and gold
The next investment platform for those with a low-risk appetite is Bonds and Gold. These investments have a lock-in period of up to 10 years in the case of bonds and 8 years in the case of gold. They offer capital protection and good returns, ranging roughly between 4-5% in the case of gold. And up to 8% for bonds.
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Disadvantages of long-term investing
Here are the main disadvantages:
- Assuming that you could be a good day or swing trader, investing can be the slowest way to make money by comparison.
- As investing re-uses the same capital relatively infrequent in comparison to trading, the annual returns are generally lower than those of a professional trader.
- Investors can have a hard time outperforming the market — thus making a return higher than directly investing into an Equity Index Fund, such as Dow Jones or DAX 30. Many professional fund managers do not beat market returns for their clients after costs.
- For example, an investor may consider an average return of 10% annually as acceptable. By comparison, day traders could make the same return in a month, and even much more.
Advantages of long-term investing
Investing seems to be more widely practiced than trading. Please mind that the term ‘trading’ is not used for investing. For that reason, we need to compare investing in trading.
Here are the advantages:
- It is easy enough for those who don’t have enough time to monitor their investments on a daily or weekly basis.
- It can be tough doing short-term trading for some traders who simply don’t have time to day trade.
- Winning traders are a minority in the pool of traders; that is, investing may be a better choice of asset allocation.
- Investing is, simply put, less “active” when participating in the markets.
- Holding a position or investment for longer than a year potentially allows you to benefit from tax concessions in respect to capital gains tax.
Most of you might be holding one or the other. So, let us know which reaped you more benefits. Share your experience. However, one cannot overlook the truth that chopping of the investment, which you planted, the midway will deprive you of these benefits.
As per professionals, any investor is advised to hold a mix of both in his portfolio. A well-balanced portfolio through which you can enjoy the benefits of short-term and long-term investments will surely offer better results.