Five Good Reasons to Invest in Stocks Longer Term
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Most average stock market investors would probably be considered long term investors for a couple of logical reasons. Why? Because …
1) They typically are not as attuned to or interested in the stock market and its daily market fluctuations as shorter term traders are,
2) They typically stick with a particular stock purchase regardless of current market conditions.
Put another way, most average investors have a minimum interest in the stock market but they stick with their plan and do not obsess over or overreact to normal market movements. There are many advantages to this attitudinal approach to investing in the stock market which will be explored below.
1) It's Easy to Implement: Long Term Investing is easy to understand and to implement. You do not need to do much once a stock is purchased using this strategy. There is not much work and effort involved in just holding onto the investment. It takes less time to set up, manage and evaluate than any other form of investing.
2) It's Less Stressful: Short term traders need discipline, nerves of steel, intestinal fortitude and emotional control to consistently succeed in the market. Failure to perceive short-term trend changes, make quick decisions and react accordingly can destroy a short term trader's portfolio value. On the other hand, long term investors take a more pro-active approach with a view towards the longer term prospects of the particular stock and the general market.
3) It's More Profitable: By investing for the longer term you'll be less likely to miss out on a long, sustained, powerful rally. Just look at the overall market move from the lows of March 2009 to April 2010. Longer term investors were able to enjoy returns of approximately 82% just by hanging on for the duration of the move since all the uncertainty.
4) Less Risk: When you invest long term, your average returns become much more stable over time and it's less likely that you'll lose money. As you lengthen your investment horizon, your average annual rate of return over that period of time becomes less variable. As you move from a one year holding period to a three year, ten year, and finally 20 year holding period, the total number of negative returns experienced is reduced. In other words, with long investment investments, the variability in rates of returns diminishes. On the other hand, the shorter your time horizon, the more random and / or extreme your expected rate of return will be.
5) Power of Compounding: The earlier you start investing and the longer your time horizon, the more portfolio growth you'll be able to achieve assuming you reinvest earnings and dividends.