Anyone who has saved up money would be interested in investing it to earn the profit. But then are the questions “Where to invest money?”, “Should it be invested in ETFs, or Mutual Funds, or private equity funds?” and “Will it be for short-term or long-term?”
Of course, the answer to this question depends on your requirement. You want money quickly or years after.
Many immediately think about short-term buying-and-selling of securities when it comes to the stock market. These types of investment are not only suggested in advertisements but also in film and television by a bunch of active managers.
This is particularly easy as it appeals to beginners instinct and heartfelt desire of the human being - to make the big bucks as fast as possible. "Who dares wins", seems to be the motto.
If higher returns are expected with higher risks, this also means that you risk very large losses. Therefore it should be considered twice if it depends on your own retirement plan.
If you have saved an adequate amount of money that you do not want to use for a longer period of time. You can make your decision to invest that money wisely.
Real professionals know short-term stock trading is a high-risk gambling.
Financial Advice: You should only use that money on which you do not depend directly.
But If you want to use your money efficiently and want to get good returns, you should start investing in a long-term.
“If you are not willing to own a stock for 10 years,
do not even think of owning it for 10 minutes."
- Warren Buffett
Short-Term vs. Long-Term Investment
Of course, you have to decide whether you want to enjoy the free money at a short notice, eg. going out for a fancy meal, travelling, buying a dream car, etc. or preferring to put money on the high end.
In long-term investment, you can build up a financial cushion. Ultimately, in the ideal case, you can achieve financial independence. At the end, of course, everyone has to decide for themselves - short-term pleasure or long-term financial security?
In principle, much depends on the personal philosophy of life. As far as the stock market investing is concerned, the question is easy to answer. Investing on a short-term basis is a similar topic on the stock exchange as betting or gambling in the casino.
In stock trading, very few may earn a good profit but the majority lose. If you are doing it for fun then it's ok. But if you have many responsibilities such as managing family finances, children’s education, car insurance, or pension policy then it is absolutely not recommended.
Short-Term Investment Cons
Income Tax Department charges high taxes on short-term investments. Whereas long-term investment has comparatively low tax rates, for example, actively managed funds or ETFs (Exchange-Traded Funds). In some of the countries, capital gain on long-term investments is tax-free.
Always beware of dubious financial advisors who promises you quick and easy money. These are the only ones who claim to make money in a shorter period of time which can be just in dreams. Investing money over the long term brings many benefits, even if it is less spectacular.
Retail investors are always in the same traps. When stocks prices fall, the investors usually get panic, and doesn’t buy and hold the stock, but sell off the stock rather than waiting for a price hike.
“Big money is not in the buying or selling,
It is in waiting”
- Charlie Munger
Many private investors also have a false impression that you should constantly change and adjust the portfolio. This behaviour is fueled by the media, as it is constantly reported in a thrilling manner before the collapse of the financial market and drastic price falls. Because reporting stable long-term returns certainly does not sell newspapers.
Active trading brings horrible fees, which can also reduce good returns quickly. Banks and brokers are always blamed because they earn commissions and fees on every purchase or sale.
Long-Term Investments Pros
Private investors shy away from taking high risks. Therefore, one should first make sure that the risk is reduced by a well-diversified investment portfolio. In addition, the risk of investing in the longer term is much lower. Because one is not seduced to take hasty action in crises instead sit out and enjoy the long-term returns regardless of the short-term volatility of the stock market.
Here, you can practically be guaranteed good returns over a longer period of time. The risk of a loss is therefore almost impossible.
The average returns are between 5.3% and 14% per annum for a minimum investment period of 20 years. Such a return cannot be achieved with any bank account, or even with fixed interest rates.
Investment Policy Statement - A helpful tool
In order to achieve the long-term investments goal of the investor, the preparation of an Investment Policy Statement (IPS) is very helpful. IPS helps to increase the investor's likelihood of achieving his long-term investment objective by:
An IPS makes the fundamental trade-off between risk, return and liquidity.
It forces investors to disclose the starting point of their investment process. Thus, an objective review and correction can take place.
The likelihood of misunderstandings between the consultant and the customer is reduced and thus the risk of later litigation.
It helps to determine the risk appetite and capacity of the investor.
It reduces the risk of performance damaging.
It eliminates emotional influences.
It intensifies the learning effect that results from the investment process over the long-term.
Although an IPS is expensive to create and always requires a certain amount of care, it is always worthwhile due to the above advantages.
Practical Tips for Long-Term Investing
For the small retail investor there are three simple tips:
1. Don’t panic in a crisis
Never panic and leave the money, even if the situation looks black at the moment. In the long run, the stock market has always recovered. The one who sell off at the time crisis make the loss.
2. Always invest only excess money
Long-term investing only works with money you do not need, be it for normal purchases, emergencies or other things.
For this purpose one should divide one's own money into forms of liquidity as follows:
- Checking Account: Cash in these accounts represents the necessary funds to cover all short-term expenses. (e.g., rent, food, clothing, etc.)
- Savings Accounts: Money in these accounts serves as a security reserve for repairs, illnesses, etc. Here not only you can avail money immediately but these accounts bring small interest.
- Depot: Money here intended exclusively for long-term investments. The money thus serves to accumulate wealth. (e.g., Roth IRA Account for retirement, investing with investment trust, stocks, bonds and other security markets)
3. Do not try to beat the market
Somehow, most people develop an ambition to beat the market. As a result, countless articles and studies are published that examines and analyze market data and appear to make very judicious judgments on markets.
The growth of the market depends on different companies, political cycles, and country-specific situations.
In short, nobody was ever able to predict the stock market. It is a complete and complete waste of time. Therefore, you will find in the Forbes list of the top rich in the world so far no stock market timing expert.
5 reasons why long-term investing is advantageous over short-term investing
To summarize, here are the five major reasons why investing in the long term is more beneficial.
1. Fees and Taxes
Active and constant trading costs money. Some platforms give you brokerage discounts for a high volume trading activity. But these discounts are not worth, continuous active trading will always comprise high fees and additional costs.
In addition to the fees, some of which are hefty, the spreads must also be included in the bills, i.e the difference between the buying and selling price.
And finally, one must not forget the taxes, because with every profitable trade the gained profits are taxed. Although fees and taxes are also incurred when investing in stocks for a long time, these costs are considered over the entire period and are significantly less compared to returns.
2. The benefit of Compound Interest
The compound interest always brings joy to the long-term investor. When interest is calculated on the principal amount and accumulated interest of previous periods, it is known as compound interest.
When interest is reinvested immediately again in existing investment, it calculates the interest on the new principal amount, which is the sum of the original principal amount and interest yield on it.
“Compound interest is the eighth wonder of the world,
One who understands earns it, One who doesn't pay it.”
- Albert Einstein
Without adding a fresh chapter, the regular yield will continue to grow by itself. In the first years, it will be a moderate growth, over a longer period, you will see pretty returns.
Anyone who has understood the principle and effect of compound interest can not really understand why it is not being used significantly by more investors.
3. Achieve Passive Income
A long-term investment creates passive income. Once you make an investment, a more or less, constant and repetitive flow of money flows into one's own account. Conversely, it can be said that any purchase that does not result in a regular flow of money is not an investment.
Thus, the purchase of shares brings regular interest or dividends payments, clearly an investment. On the other hand, when you buy a stock that does not provide for a dividend, you are speculating with future price gains - a regular return is not expected here.
This regular cash flow, which you get without actively having to do something for it, is called passive income. A Stock or an Exchange-Traded Funds offer dividend either annually, or on a quarterly or monthly basis, thus provides a passive income.
4. Significantly Lower Risk of Loss
If you want to speculate in the short term and take out a loan, you can quickly get bankrupt. Even borrowing for real estates investments such as the residential house, or a commercial property makes limited sense.
On the other hand, a long-term equity investment such as ETF investment at worst has a maximum 50% downside risk in the early years. After that, over the remainder of the term, the risk of loss is virtually non-existent. For many years of history shows that the average return on the stock market is over 8% per year.
A well-diversified portfolio of global assets is certainly the most profitable and convenient solution for the retail investor. Because with a single share, in the worst case, the money can be almost completely lost after a few years.
For leveraged instruments such as warrants, structured products or trading options, the capital invested in the worst-case scenario is even lost within a few days or even hours.
5. Investing is beneficial to Health
Anyone who uses the compounded interest for themselves builds his fortune over time. A pretty passive income allows them to relax at some point and enjoy a stress-free life.
Quite different is the short-term, active trader constantly lives in stress and fear of the next stock market crash. He can barely let go of the stock market events, the market analysis, and future forecasts.
The long-term investor usually does not care at all, or very little, about the daily price fluctuations, while the trader is usually tensed and permanently watching events. Thus, the long-term investor can find a peaceful sleep, relaxed on vacation and dedicated to the beautiful things of life, together with his family.
In short, a small private investor who wants to build a fortune and wants to do something for retirement should go for long-term investment.
However, it is important that you bring patience and only use the money for long-term investments that you do not need. This avoids that you may have to sell at a loss in a crisis situation, and the crisis can not sit out.
Therefore, you should have a daily allowance account for the emergency in addition to the normal current account for the monthly costs. Money invested for a long-term should no longer be touched.
Read more about our best approach for long-term investing under