Why should you invest long term?
Hi, This is Viram from Vested and today we are going to be showcasing some interesting data around the power of long-term investing.
As Warren Buffett said if you aren’t thinking about owning a stock for 10 years don’t even be thinking about owning it for 10 minutes.
To demonstrate the power of long-term investing, let’s look at a couple of scenarios. Pick a date from the last 40 years and imagine that you invested a sum of money on that date. Then you went ahead and sold that investment exactly four years later. What are the chances that you would earn a positive return on that investment?
Well, to be able to answer that is not that straightforward, you need to do some analysis. The analysis involves picking every possible date over the last 40 years considering that you invest money and then sell that investment four years later. Now plot the distribution of returns that you get from this exercise to understand how often you get a positive return.
If you go ahead and run this entire scenario you will see that 85 percent of the time if you hold your investment for four years you end up with a positive return and the rest 15 of the times your investment gives you a loss.
Now it gets very interesting as you increase the time period of holding your investment. Now let’s say you held your investment for a period of five years. In holding your investment for just one more additional year the chances of a negative return drop from 15 percent to 10. If you further increase the holding period to 12 years the chances of making a loss reduce to 1 percent. And if you hold it for 15 years they become nearly 0 percent.
Of course, this analysis does not guarantee that every 15 years you will not make a loss in your investments. But what we are trying to say is that you significantly reduce the chances of losing money the longer you hold your investment.
Even though the benefits of long-term investing are very clear, a lot of people fall prey to daily news or daily profit and loss investing. And thus make a lot of erratic short-term decisions. Speculative trading can definitely feel like a way to make quick money but it’s also a way to make quick losses.
By investing with a long-term outlook, we are better able to withstand the harmful effects of volatility, market downturns and recession and more often than not generate positive outcomes for our portfolios.
So that was it on long-term investing.
Stay tuned for more.