The benefits of long-term investing
Some of the benefits associated with long-term investing include:
The potential for growth over time
One of the benefits of long-term investingis the potential for market growth. Stock markets may fluctuate daily during particularly volatile periods, but if you look at the wider picture, the trend has been for stock markets to rise over time. Of course, past performance isn't a reliable guide to future performance, but holding an investment for the long haul could increase the potential for a higher return, helped along the way by the compound growth.
Compound growth is the return earned not only on your initial investment, but also on the returns you receive during its lifetime and reinvest back into it.
If you're only investing for the short term, you won't see the full potential gains of compound growth.
Pound cost averaging
Pound cost averaging is a term referring to the potential benefits of regular investments over that of a single lump sum. It works on the basis that steady investments, in a fund for instance, can help reduce the effects of market downturn that investing a lump sum might expose you to.
This 'drip-feed' approach means you continually invest regardless of whether the markets rise or fall. This allows you to buy more assets (or units in a fund) when prices are low and fewer when they're high.
As a simple example, you could invest £3,000 as a lump sum or invest it monthly over the course of five yearsat £50 a time. The lump sum buys a set amount of units/assets at their current price in one fell swoop. Meanwhile, a regular investment can potentially benefit from price fluctuations over the course of 5 years. This means when the markets are down your £50 will buy more units/assets than when they're soaring high. The cost of investing can potentially average out over time, so the average cost per unit/asset is less than if you'd bought them with a single lump sum.
Potentially less risk
Although there's no such thing as a risk-free investment, long-term investing has the potential to be less hazard-prone than a short-term approach. A longer timespan gives your money the opportunity to ride out any storms that might blow through the markets, driving off course those who had their heads turned by short-term gain. The nature of stock markets means that once the storm clouds have passed, the tendency is for blue skies to return.
With a short-term outlook, there is often the temptation to pull money out at the first sign of trouble, taking the hit, but not taking the time to recover. A long-term outlook offers the potential for a calmer experience and a stronger investment return.
