One way to have more certainty of achieving those solid returns from investing is to invest for the long term—ideally, 10 years or more. We thought we’d spend some time getting into the details of this approach. Take a look:
You don’t have to try time the market
It’s all about time in the market, not timing the market. When you invest in shares for the short term, it becomes more and more important to buy and sell at precisely the right time—the pressure is on to buy right before prices go up, and sell right before prices go down. But this is really hard! People get it wrong all the time, which is expensive.
On the other hand, think about investing for the long term. If you’re going to sell in the distant future, it doesn’t really matter if you buy your shares today, tomorrow, or next week. If an investment is fundamentally good, it’ll grow over the long term even if the value goes up and down in the short term.
What’s more, if you’re investing a little bit every week or so, the ups and downs matter even less, thanks to dollar-cost averaging. This is when you invest on a regular basis, regardless of what the price is. With dollar-cost averaging, you get bargains when the price is lower than average, which smooths out the money you invest when the price is higher than average. This is one of the advantages of investing for the long term.
By investing for the long term, you can avoid these little traps, because all you need is for the value of your investment to rise over a long period of time—which is what tends to happen over time anyway. The day-to-day and week-to-week movements aren’t such a big deal, because you’re in it for the long haul—you can relax on stressing about the day-to-day!
You can invest an amount you can afford
When you’re investing shorter term, you kind of need to invest a larger amount in order to make it worth it. After all, if you invested $1, and made a 10% return in a week, you’d have...$1.10 at the end. That’s a great percentage return, but it’s not going to make a big difference in your life.
But how are you meant to come up with $10,000, $20,000 or more? You still have rent to pay, groceries to buy, fuel to put in your car.
Investing for the long term means you don’t have to come up with a large amount at once. Instead, you can invest a bit at a time, so your investments don’t impact your day-to-day life too much. You might invest thousands of dollars in total, but at the rate of $50 or $100 a week or so. You can also increase that amount over time, and invest larger lump sums now and again too.
By investing for a long period of time, you give yourself the time and financial space you need to build up to a large amount that will make a significant impact on your life. If you’re not rich, this is a lot easier than investing for the short term.
You need time for compound interest
Compound interest is one of the best things about investing for a long time. It’s when you earn some interest or other returns, then start to earn returns from those returns. After a while, your returns are earning heaps of money just on their own, on top of the money you invested in the first place!
But it’s impossible to get this benefit without investing for the long term, because your returns need time to grow.
You don’t have a crystal ball
As we said above, the market in general tends to increase in value over time. But you don’t know the specifics of how it’s going to go up and down along the way, and you don’t know when these ups and downs are going to happen. And since you don’t have a crystal ball, you can’t know that!
Of course, neither do people who invest for the short term. So they make considered decisions, based on lots of research, conversations with experts, and years of their own experience to draw from. This can be time-consuming, expensive work! When you invest over a long time, you can just set and forget, and live your life—given that your investments are well-diversified!
And here’s another thing about that crystal ball: you don’t know what your future financial life is going to look like. Hopefully, things will be looking good, and you’ll have some security, but you don’t know that. What you do know is that you have some money to invest today. So by investing for the long term, you’re planning for your future. You may not know what that future looks like, but investing for the long haul is a great way to help make it a good one.
There’s nothing wrong with short-term investing. For people with time and expertise, it can be a good strategy. But like all high-reward investing, it comes with a lot of risk. If you’re not in the position to take these risks, we reckon you’re better off investing for the long term. It’s easier, lower-risk, has better outcomes for most people, and gives your future self the resources to have a great life.
Ok, now for the legal bit
Investing involves risk. You aren’t guaranteed a return, and you might lose the money you started with. Before investing, you should read your fund’s product disclosure statement. It contains the investment objectives, risks, fees and other information. You should carefully consider this information in relation to your investment time frames and goals.