I can’t emphasize enough how important long term investing is, especially in these challenging times. In recent weeks, stocks have corrected and become quite volatile. It’s scary, but with a long term mindset, fear becomes an afterthought. Many investors buy or sell on the latest blockbuster news, price momentum, or earnings release. Nowadays they worry about trade wars, political instability, and interest rates. Even in a worst case scenario, these risks smooth themselves out over time. With that in mind, here are eight reasons why long term investing is essential:
1. Lower taxes
Long term capital gains and dividends are taxed at a lower rate (0-20%). However, if you buy and sell securities regularly you’re likely to pay ordinary income rates. In the U.S. these higher rates apply for investments held for less than one year. Even if you are a decent trader, additional taxes add up substantially over time.
2. Lower fees
Most brokerages charge to buy and sell securities. For example, Ameritrade charges $6.95 per trades. I’ve seen others charge as high as $10. Like taxes, these additional costs add up quickly!
Remember the DRIP programs we discuss so regularly? Dividend growth investing over the long term allows you to benefit from compounding. Collect the dividend, reinvest it, and repeat. Even if the stock is down price-wise you’re still likely to make some kind of return. For instance, I bought P&G four years ago for $82 and invested around $4500. That same position is now worth $4900 years later at $80/share. Enough time and patience can turn a loser like P&G into a modest winner.
4. No emotions
This mindset certainly takes time to develop but it is well worth it. If you truly have a long term mindset the fear we mentioned earlier disappears, or at the very least, is diminished. One way this can be accomplished is best explained by Dave Ramsey. Eliminate your debt, have an emergency fund, and invest the rest knowing you DON’T NEED THAT MONEY NOW. If you don’t need money now who cares if the market goes into correction? After all, you’re accumulating more shares with your DRIP program. And historically, the market has ALWAYS recovered.
5. It’s easy
Learning technical analysis, trends, financial derivatives, platforms, comprehensive security analysis and the like is challenging. These skills are valuable but much more so when it comes to options trading and/or predicting price movements based on an upcoming earnings release. However, buying a solid business with a long track record of successes has never been easier. There are countless finance web sites and investment tools available on brokerages. Even if you don’t understand finance, brokerage sites like Ameritrade can help you build a consensus among analysts. For those who have trouble buying individual securities, investing gurus like Warren Buffett recommend “indexing”. Indexing is essentially buying an index fund, or the whole market, and letting it ride.
6. Less risk
Most importantly, long term investors are able to seize opportunity. Buying or selling based on a recent earning release or piece of news causes investors to miss out on significant gains. A study by J.P. Morgan Asset Management looked at the S&P 500 between December 1993 and December 2013. The study concluded staying invested all 20 years would have resulted in a 483% return. However, missing the 10 largest moves up would have slashed returns to 191%. Even worse, missing the 30 best days in the same period would have resulted in a return of less than 20%. Even the Great Depression didn’t hurt most long term investors. In July 1932, towards the market bottom, the dividend yield of the stock market was 14%. At face value the market crashed in 1929 and didn’t recover until 1954. However, after accounting for deflation, massive dividends, and price appreciation the market actually recovered 4 years and 5 months from the low (according to Sunday Business by Ibbotson Associates). The low was 1932 and investors started earning positive returns around 1937.
Volatility in the stock market is expected to continue into the near future. Don’t be afraid of these minor price fluctuations. Remember, buying a stock should be seen as becoming a silent partner in a quality business. Think about the products the company sells and the services is provides. Love and enjoy them! If you own KO, crack open an ice cold Coca Cola and smile knowing you’re part of that great company. Really “owning” a company and its products can help develop this long term mindset. Doing so will allow you to sleep better at night, augment your returns, and beat the vast majority of investors.