The world we live in is going very fast, maybe too fast. From when the alarm clock goes off in the morning until we go back to bed to sleep, we run everywhere. What stress, don’t you think?
Time is, without a doubt, one of the most precious assets for anyone today; and also from investors. Who has time to sit for several hours a week to analyze companies and financial markets? Very few people.
The limited availability of free time is, among other factors, one of the reasons why many investors abandon short-term investments such as trading and decide to switch to a more relaxed investment style that also offers better long-term returns: investing long term.
In this article, we are going to analyze the advantages and disadvantages of long-term investments.
Advantages of long-term investments
We will start on the positive side, focusing on everything that makes life easier for us, not having to keep track of our savings.
1. It allows you to be carefree
As we said at the beginning, the characteristic note of this type of investment is the lower need for constant information that we require.
While short-term investors need to be aware of all economic information, a long-term investor can afford not to have to check the economic press except at times when they feel like it.
2. Exposure to risk is lower
The second great advantage of long-term investing is that there is less exposure to risk, although ultimately this will depend on the investment vehicle we choose.
If, for example, we buy stocks of solid companies with a Buy & Hold mentality or we invest in an index fund with a time horizon of a decade, the probability of incurring losses is lower and in the long term, they are diluted.
3. It is easy to understand and to put into practice
The short-term investor has to be continually analyzing companies to determine which are the best of each moment and decide whether or not to incorporate them into his portfolio. It is a tedious and complex process.
On the contrary, investing for the long term is easier, since it is a much easier strategy to understand and also to put into practice, especially if we automate it by investing in mutual funds or ETFs through an automated manager.
4. You take better advantage of the effect of compound interest
Compound interest is a mathematical formula that allows you to accumulate a large wealth over the years, since the interest earned on the investment is not withdrawn, but is capitalized.
In practice, the behavior of compound interest resembles that of a snowball that increases in size as it rolls down the slope. Therefore, the longer the time horizon of our investment, the better we take advantage of its effects.
5. You make fewer mistakes
If you don’t have the need to continually rotate the assets that make up your portfolio, the likelihood of making mistakes will be less.
A long-term investor who is able to remain skeptical of the evolution of the financial markets will obtain better results because he will make fewer investment mistakes.
6. It is safer
In short-term investments, market timing is essential. If you make a mistake choosing the time of purchase (or sale), you can write off your investment.
In the long term this problem does not exist, since there is a long time to correct a bad entry in the market. Therefore, it is a much safer investment strategy.
7. Has lower commissions
If we invest in a fund that has a short-term portfolio turnover of 80% we will probably have to face high commissions and brokerage expenses.
On the contrary, when we invest long-term with a passive management strategy, the commissions are very low because the work of the fund managers is practically automated.
This is why index funds and ETFs are the cheapest investment instruments out there.
Disadvantages of investing in the long term
On the negative side, the drawbacks offered by long-term investments are mainly two:
1. It is emotionally more complicated
The most important handicap has to do with managing emotions, anxiety and panic. As an investor, we must be prepared for bad news from the media, which unfortunately always makes more noise than good news. And this is not always easy.
In addition, when we invest in the long term we must know that we will have to deal with crises and major falls in the stock market. From one month to the next we can find -15% or -20%, and for this reason, we should not make hasty decisions.
It is very important to be clear about the objective for which we had set our investment (for example, for the children’s university) and to remain firm until we achieve it.
At no time should we get carried away by the moment or by uncertainty, if we do not adjust to the strategy set and remain impassive in the plan?
2. Lack of liquidity
The second disadvantage has to do with the lower economic availability in the event of an emergency, such as losing a job, a major illness or an accident. Since we can be in a bad moment of the market for the liquidation of the plan.
For this reason, we should only invest in the long-term that percentage of our savings that we will not need in the short term and once we have an emergency fund. This will save us a lot of scares.
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