Long Term Investing: What, Why, and How
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This article was edited to meet broker-dealer compliance guidelines in April of 2023.
What Is Long-Term Investing?
Long-term investing is simply investing for the long term through the practice of buying and holding investments. It is not speculating on the short term price movement of various investments with the purpose of selling quickly.
At the least, “long term” would imply holding an asset for greater than one year - the minimum period required to qualify for a lower tax rate on any capital gains created from the investment.
However, while a general “long-term” investment could be 1-5 years in duration, many look to invest for even longer periods of time.
There are mountains of research showing that we are all bad at timing investments, as emotions like fear, greed, and excitement can cloud judgements that are already difficult to make.
Despite this, and despite most investors’ intent to invest for the long-term, human nature tempts us to be “traders” or “flippers” out to make a quick buck and do it again.
If we want to defeat the temptation to believe “I am smarter than the market” and to invest for the long-term, it is important to consider the reasons why to invest long-term as well as some different types of long-term investment strategies.
Why Invest Long-Term?
Beyond a lifestyle with less worry about the daily movements of your portfolio, focusing on long-term investing has many tangible benefits.
Tax savings are perhaps the easiest to identify, as these can be substantial given (1) a lower capital gains tax for long-term capital gains instead of short-term capital gains, and (2) capital gains taxes are generally not due until the asset is sold meaning that your investment can continue to grow tax-free until you cash out.
Holding investments for longer also means you can save on transaction fees. Lastly, portfolio stability and the compounding of investment capital serve as powerful arguments in favor of long-term investing.
Now that we have discussed the “what” and the “why,” let’s take a look at a few ways of “how” to think about investing long-term.
Dollar Cost Averaging
Dollar Cost Averaging, or “Constant Dollar” investing simply means spreading an intended investment over time rather than placing the investment all at once.
For example, if you decide to invest $100 into stocks in the S&P 500, rather than doing it all that day, you could simply invest $10 per day over a 10 day period. This can help reduce volatility in investments and provides the investor the ability to “step in” to asset classes.
Separate Emotions From Investing
This one is the easiest to understand but probably the hardest to actually do.
Many investments can offer moments of both extreme excitement and/or disappointment. It is usually important not to act when you are feeling this way.
For example, many investors may become excited to receive an unsolicited offer on a real estate investment and want to sell immediately realizing a gain on their investment.
However, it is often unwise to take the first offer, as a purchaser may be willing to pay more and/or there may be other potential suitors in the market.
For a fun example of this, see this article from Bloomberg News that describes how a couple sold 1 acre of land to Apple for $1.7 million.
They are certainly happy not to have taken the first offer!
Stick to Your Plan
Building a plan for long-term investing is obviously important, and requiring of its own intense diligence and construction.
Working with a professional financial advisor to build such a plan is most-often the route individual investors will take. However, once you have a plan, staying the course is of exceptional importance.
As most investment plans will take years to execute, sticking with your plan will allow the time for your plan to be realized. It is tempting to allow economic fluctuations or investment-specific issues to alter your plan, but be sure to stay on the road you set out on.
For reiteration, see above on separating emotions from investing!
Focus on Compounding
Compounding, or allowing your capital and interest to be reinvested and continue growing, is perhaps described best by Albert Einstein: “the strongest force in the universe is compound interest.”
Let’s take a look at the example below.
You have $100 to invest and are provided with two different options:
Your money will double over a 10 year period.
Your money will earn 8% a year for the next 10 years.
Many people choose to double their money, leaving $200 in total after 10 years.
However, growing and reinvesting at just 8% a year for 10 years would leave you with $215.89, a far better investment return.
Compounding often involves 1) more stable assets, and 2) long periods of time.
This is why we like farmland investing at AcreTrader - it has proven over decades to be a consistent way to compound investment capital.
This may already be implied by the discussion above, but “trading” is most often the opposite of long-term investing.
If an asset reaches your expected return threshold early and you take some profit off the table due to better investment options available, that can be a rational and non-emotional investment decision.
However, constantly churning through “buy” and “sell” has several drawbacks. Beyond being inherently risky, this can have materially negative tax consequences while also creating additional and unnecessary fees for the investor.
Long-term investing clearly has its benefits, and most investors already have at least some portion of their investments built around a long-term strategy.
However, being thoughtful about the design and execution of a long-term investment strategy is highly important. As part of that approach, doing research, building a plan, hiring a financial advisor, thinking for the long term, and preparing to endure the ups and downs are all important components of the journey.
The above content is not intended to be a comparison between products, but is intended for general, educational and informational purposes only. Any performance noted is historical and there is no guarantee any trends will continue. All investing involves risks, including the complete loss of principal. Diversification does not guarantee a profit or protect against loss in a declining market. It is important for each investor to review their investment objectives, risk tolerance, tax liability and liquidity needs before investing. Investment vehicles have differences in fee structure, risk factors and objectives. Investments are considered speculative, involve a high degree of risk and therefore are not suitable for all investors.
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