Have you ever wondered what investment strategy to secure your family’s future? Which strategy can make your pockets fuller – short-term investing or long-term investing? If you look for solutions online, you may get stuck in the confusing mesh of options and end up frustrated.
So, don’t worry about ways to protect your family’s future, as we have made your job simple with this article. This article will cover everything about long-term investing.
Also, how does it work, and what makes long-term investing the best way to secure your family’s future and achieve your financial goals? But before we move to the benefits of long-term investing, let’s explore what long-term investing is all about.
Understanding Long-Term Investing Strategy
Long-term investing is buying and holding assets like mutual funds, stocks, and real estate for a long period, usually more than a year, and letting them grow in value over time. Long-term investing has many benefits, including compounding interest, tax efficiency, reduced stress, and improved quality of life.
Long-term investing is not a gamble or a matter of luck but a game plan. The market rewards patience, not speed. It’s not about finding the right moment to invest but about staying invested for a long time.
Real-Life Example of Long-term Investing
Let us use an example to dive deeper into long-term investing concepts. Let’s say Investor C and Investor D invest ₹10,000 in XYZ company. This growing and profitable company pays a dividend of ₹2 per share annually and increases its earnings by 15% annually.
Investor C believes in long-term investing and holds his investment for 10 years until December 31, 2029. He reinvests his dividends every year, buying more shares of ABC at the prevailing market price. He also benefits from the compound growth of ABC’s earnings and share price.
Assuming that ABC maintains its dividend payout ratio and earnings growth rate, Investor C’s investment will be worth ₹52,378.64 by the end of 2029. His total return is ₹42,378.64 (423.79% of ₹10,000), as well as his taxable income as a long-term capital gain.
Investor D is a short-term investor who sold his investment after one year on December 31, 2020. He receives ₹11.50 per share, which includes the dividend and the capital gain of ₹1.50 (15% of ₹10). His total return is ₹150 (1.5% of ₹10,000), which is also his taxable income as a short-term capital gain.
To calculate their investment values and returns, we can use the following formulas:
- For Investor C, the annual rate of return: R = G + PD
where g is the annual growth rate of earnings and share price, D is the annual dividend per share, and P is the share price.
The annual rate of return is: r=0.15+2/100 i.e. R = 0.35
- For Investor C, the future value of his investment after 10 years: FV = PV(1+r)n
where FV is the future value, PV is the present value, r is the annual rate of return, and n is the number of years.
The future value of his investment after 10 years is:
FV=10000× (1+0.35)^10
FV=52378.64
His total return: TR = FV−PV i.e., TR = 52378.64−10000
Total Return (TR) =42378.64
His percentage return(PR) is: PR=TR/PV × 100
PR = (42378.64/10000) × 100 i.e. PR = 423.79%
- For Investor D, the future value of his investment after one year: FV = PV +G + D
where G is the capital gain per share.
- The annual rate of return for Investor D: R = PG + D
For Investor D:
The annual rate of return is:
R = (1.5+2)/10 i.e. R = 0.035
The future value of his investment after one year is:
FV=10000+(1.5×1000)+(2×1000)
FV=10150
His total return (TR): TR = FV−PV
TR=10150−10000 i.e. TR=150
His percentage return (PR) is:
PR= TR/PV × 100
PR= (150/10000)×100 i.e. PR =1.5%
As you can see, Investor C has earned much more than Investor D by long-term investing. He has also paid less taxes since long-term capital gains are taxed lower than short-term. Moreover, he has enjoyed the benefits of compounding interest, dividend reinvestment, and earnings growth.
Benefits of Long-term Investing
Power of Compounding Interest:
Compounding Interest is a magical process of growing your money. Simply put, earning interest on interest can help you grow your wealth exponentially over time. Compound interest gives you a higher future value because you earn interest on your initial investment and reinvested payments.
Say you invest Rs. 100/- annually in an investment offering 10% interest. You will be surprised to know the long-term investing returns. With the magic of compound interest, you will have ₹1753.11 after 10 years.
Also Read: What is Compounding?
Tax efficiency:
Long-term investing can help you save on taxes and fees, as long-term capital gains are taxed lower than short-term ones. Also, long-term investing can reduce the impact of commissions and transaction costs on your returns as you trade less frequently
Reduced stress:
Long-term investing can help you avoid the stress and emotions involved in making investment decisions, as you do not have to worry about market fluctuations, volatility, and noise. You can keep your long-term goals in mind and follow your investment strategy.
Improved quality of life:
Long-term investing can help you achieve your financial goals and secure your family’s future. You can enjoy peace of mind and satisfaction when you have no behavioral or emotional biases or fear of short-term market fluctuations holding you back. You can also spend more time on other aspects of your life, such as your health, hobbies, and relationships.
Portfolio Diversification:
You can diversify your portfolio and reduce your risk in long-term investing by allocating your funds to different asset classes, such as stocks, bonds, real estate, etc., with different characteristics and performance.
You must also invest in different sectors, industries, markets, countries, etc., with different growth potential and risk factors. By diversifying your portfolio, you can reduce the impact of any single asset or market on your overall returns and lower your exposure to volatility and uncertainty.
Key Takeaways
Long-term investing effectively supports your personal and professional growth, your family and social relationships, your health and well-being, your hobbies and passions, and your contribution to society. You can create a meaningful and satisfying investment journey by aligning your investment strategy with your life purpose.
Long-term investing is a smart, sustainable, and disciplined way to grow wealth and secure your family’s future. You gain financial and emotional well-being and improve your quality of life by adopting this time-tested long-term investing strategy.
So, if you haven’t already, take your first baby step towards starting your long-term investing journey today and reap the benefits tomorrow.
NOW READ:
Long Term vs Short Term Investing
FAQs
How to avoid common mistakes and pitfalls in long-term investing?
To avoid common mistakes and pitfalls in long-term investing, you need to remember a few basic guidelines-
1. Avoid selling winners too soon or holding onto losers too long,
2. Stop chasing hot tips or trends without doing your research
3. Do an in-depth fundamental and technical analysis of any stock. In the case of mutual funds or other assets, assess the risks first
4. Do not change your investing strategy too often or too randomly
5. Avoid letting emotions or biases influence your decisions
6. Do not ignore the fees or taxes that can erode your returns
7. Always review or rebalance your portfolio periodically.
What are some of the best long-term investment options for your needs?
Some of the best long-term investment options, depending on your risk preferences and time horizon, are stocks, bonds, real estate, mutual funds, exchange-traded funds (ETFs), Public Provident Fund (PPF), National Savings Certificate (NSC), and many more.
How to start or continue your long-term investment journey?
To start or continue your long-term investing journey, you need to get your finances in order, know your time horizon, pick a strategy, and stick with it. If possible, learn to diversify your portfolio across different sectors, industries, themes, and geographies.
Monitor your performance and progress timely. You also need to adjust your strategy according to changing market conditions and personal circumstances, balance your long-term goals with your short-term and medium-term needs, and deal with the psychological and emotional challenges of long-term investing.
I’m Archana R. Chettiar, an experienced content creator with
an affinity for writing on personal finance and other financial content. I
love to write on equity investing, retirement, managing money, and more.