Building a diversified portfolio by investing in multiple asset classes may seem like an easy task. It indeed can be achieved through a systematic and disciplined approach to investment. On the other hand, staying committed to your asset allocation framework and holding investments for the long-term may not always be an easy. A lot of people across the world invest but not all are as successful as Warren Buffet. On the other hand, there are a large number of investors who continue to destroy wealth even as you read this article.
What we need to pay heed to is the fact that Buffet did not become the “Oracle of Omaha” overnight. It took him years of disciplined investment to become a successful investor and create wealth. All investment theories and financial plans start with the concept of investment horizon and conclude that the longer the horizon, higher is the probability of success.
Following are a few points that explain why long-term investing is important;
Most businesses work in the cycles that often mimic the wider economic cycles. This means that their profitability and growth gets negatively impacted during the troughs and surges during the peaks. It is challenging, if not impossible, to accurately predict the short-term performance of a company. However, over the long-term, one can identify broader economic trends and predict company growth rates and profitability with far more accuracy.
Betting on markets for a shorter period could be volatile and risky for an individual investor. This is primarlily because in the short-term, the markets are subject to a lot of noise that can distort the performance of a stock. When you remain invested in the market for a longer period in particular stocks, it averages out the daily ups and downs and provides stable returns over the years. For a short period of investment, you need to time the market which requires lots of analytical and financial skills.
This is the biggest benefit of investing for the long term. Compounding is simply earning on earnings. Compunding ensures that you not only earn interest on your original prinicipal amount but also on the interest that you accumulate over a period of time. The longer you stay invested, the stronger the impact of compounding on your investments.
It is also important to be cautious about a few things before you plan to invest for the long term. Things like risk profile, portfolio diversification and investment review need to be done regularly to check the performance of your investment. It is always advisable to contact a financial planner or wealth adviser to make investment plans.