When many people think about investing, they want to find a way to make a quick buck, but long-term is the way to go. They envision finding that one stock that will make them a millionaire overnight. However, that’s not usually the best way to think about investing, especially when it comes to stocks. Warren Buffett has advised investors to get rich slowly, and here’s why.
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The benefits of long-term stock investing
Long-term investments are those you intend to hold for more than five years, while short-term investments are held for less than five years. It's much easier to build wealth over the long term than it is in the short term. The best investments are usually those that you can buy, hold and watch compound over the years.
Long-term investing enables you to build wealth in a predictable way, as assets typically rise and fall over time. By investing for the long haul, you smooth out the volatility in the markets. Long-term investing takes some of the guesswork out of investing in the stock market. It's easier to pick stocks that will grow steadily over time than it is to pick one that will be hot temporarily, allowing for short-term gains.
When you invest for the long term, you can also take on more risk because you have more time to make up for any potential losses that might occur as a result of that risk. With more risk comes more opportunities for gains so that you could see even greater gains in your long-term portfolio.
What assets make good long-term investments?
Almost any asset can be a long-term investment, including everything from real estate to stocks and long-dated bonds. Stocks make especially good long-term investments, especially blue-chip stocks that are household names and likely to rise steadily over time.
Any investment that is less liquid makes a better long-term investment than a short-term one. If you're saving for retirement, 401(k) accounts and traditional and Roth IRAs are great options for holding stocks. In some cases, you are penalized for withdrawing the money early, so you are incentivized to buy and hold until retirement.
Other popular long-term investments include stock index funds, exchange-traded funds, and robo-advisors.
Stocks as a long-term investment
Stocks can be either a long-term or short-term investment, but the nature of investing with each timeframe is different. The best practice is to buy and hold stocks for an extended period, as demonstrated by the S&P 500's negative return in only 10 of the 45 years between 1975 and 2019. Stock returns are extremely volatile in short timeframes, but they tend to appreciate steadily over time when looking at a multi-year time horizon.
Long-term stock holdings almost always outperform short-term ones. According to CNBC, stocks have outperformed almost all other asset classes over many years. Looking at the 87 years between 1928 and 2015, the index averaged a 9.5% return every year. That return beats three-month Treasury bills' 3.5% return and the 5% return of 10-year Treasury notes.
When you hold stocks with a short-term mindset, you don't give your portfolio time to ride out any low times when you've lost money. That's why when looking at stocks over a long timeframe, the returns are much better than other assets. It's not unusual for stocks to decline 10% to 20% in a short timeframe, but stocks that make good investments always come bouncing back.
Another benefit of holding stocks over the long term is the fact that you don't let your emotions get in the way of your decisions. When you've determined that a stock would be a good investment not only now but also five years from now, you can avoid making a mistake and selling it due to an emotional decision based on a news headline.
When short-term investing does apply
Even though long-term investing is usually better, it doesn't mean investing with a short-term mindset doesn't have its place. Sometimes you need to save for a short-term goal, and you need to invest to increase the amount of money you will have to meet that goal. It all depends on when you will need the money.
Short-term investments tend to run to one of two extremes. Investors who are nearing retirement tend to opt for less risky investments like short-term bonds, which have higher annual return percentages than savings accounts or certificates of deposit.
However, day traders seek out volatility and try to profit from it, so they target stocks or foreign currency trades that will earn them a sizable return in just a short time, often a matter of hours.
Long-term investing is the better choice if you have plenty of time to save up, especially when it comes to stock returns. You can find here some help creating long-term stock investing portfolios.
