Investing is a complex endeavor that requires careful consideration and patience. Many investors focus on short-term gains and daily performance, but the truth is that the long-term is what really matters.
Time is a precious commodity that can never be replenished once it's gone. As investors, we always look for ways to maximize our returns and grow our wealth, but what if the best investment strategy was waiting? The truth is, time is the secret ingredient that can turn an average investment into a profitable one. In this article, we will explore the idea of long-term investing and why investors need to think beyond the short term.
One of the biggest mistakes investors make is focusing on the daily performance of their investments. Daily performance means nearly nothing in the grand scheme of things. Investments go up and down all the time; in reality, that's all they do. But they tend to move in a positive direction over the long term. Instead of focusing on the daily noise, investors should focus on the long-term trend. Too many investors miss out on long-term growth because they want short-term results.
Sure, the short term can be an attractive place for investors to focus their attention. It's easy to get caught up in the hype of a trending sector or stock and feel like you're missing out on potential gains. What's hot today may not be hot tomorrow, and vice versa. Many active investors and traders can succeed with short-term moves in the market, but if you aren't one of those people or have yet to learn to trade, you have two options, learn to trade or focus on the long-term.
When you invest for the long term, you give your investments the time they need to grow and compound. Compounding is the process of generating earnings on an investment's reinvested earnings, and it can turn a small investment into a substantial one over time. The longer you hold an investment, the more time it has to compound. Therefore, long-term investing is equally important here. Let's say you invested $10,000 into an S&P 500 index fund, such as SPDR S&P 500 ETF Trust (SPY), on January 1st, 2010. Over the past 12 years, the fund has provided an average annual return of about 10%. By December 31st, 2022, your initial investment would have grown to around $51,600 without any additional investments.
Now, imagine you had invested an additional $200 per month into the same index fund over the same period. At the end of the 12 years, your total investment would have been $36,000, and the account balance would have grown to nearly $93,000. That's almost double the return you would have received with just your initial investment! This is the power of compounding. By consistently reinvesting your earnings, your investments can grow at an accelerated rate, even if you're only contributing a small amount each month.
While investing in high-quality positions like blue-chip companies, ETFs, or indexes is generally considered the safer, more reliable way to invest for the long term, no rule says you can't invest in whatever you want. If you have an investment thesis, consider probabilities, and think the risk/reward is reasonable, investing in lower-quality or higher-risk positions is not entirely wrong. However, as mentioned, it's essential to be aware of and prepared to take that risk. You can't be shocked if you put your entire portfolio into a meme stock and lose money. However, it's not unreasonable if you place most of your portfolio into high-quality investments and use a small % of your portfolio to pick higher risk/reward positions. Just be aware of where you're putting your money and understand the potential outcomes of that investment.
In conclusion, investing for the long term is a simple but powerful strategy. By focusing on the big picture and zooming out, investors can avoid getting caught up in the daily noise and short-term trends. The power of compounding can turn a small investment into a substantial one, and quality stocks, ETFs, and indexes can provide investors with a higher probability of long-term ROI. Remember, besides analysis, time is your greatest ally in investing, so use it wisely and reap the rewards.