Investors often try to benefit from betting on short term shifts in stocks. However, it often doesn‘t work, because it is difficult (or almost impossible) to buy and then sell with perfect market timing. In the following, I will give you seven advantages of long-term investing over speculating short-term at the stock market.
Seven advantages of long-term investing over speculating short-term at the stock market:
1. You pay less trading fees
Depending on your bank account, you need to pay fees every time you buy and sell stocks. For your bank or your broker, it is a good deal, if you buy and sell stocks every day as a day trader. But for you, it usually isn’t. In order to pay fewer fees to your bank, you better buy the stock and then benefit from the profit of the company on a long term basis.
2. You benefit continuously from the dividend payments of the company
Depending on the company you are investing in, you can benefit from the dividend payments of the company. The dividend is the sum of money paid regularly by a company to its shareholders, for example you. Depending on the company, the dividend is paid once a year, twice a year, quarterly, or even monthly. If you invest on a long-term basis, you benefit continuously from the dividend payments of the companies you invest in. However, if you speculate on a short-term basis, you might not be able to do so, because you miss out on the time the dividends are paid.
3. You do not have to follow the stock market every day
If you are a long-term investor and you do enough research to identify excellent companies before you invest, there is no need to follow the stock market or the economic news each and every day. You profit by having identified excellent companies, and know that you benefit financially from the results of this company on a long-term basis.
4. You give your money more time to grow
Regarding data which has been tracked back to 1965 by the company Berkshire Hathaway, the compounded annual gain in the S&P 500 between 1965 and 2019 was 10%. The S&P 500 index is a benchmark of American stock market performance. This index includes 500 of the largest publicly traded companies in the United States. This means that if you invested today in the S&P 500 index with a very long holding period, you could expect a long-term yield of about 10% annually on average.
For a better understanding of how you can benefit from a long holding period, I would like to show you the following example: Let’s say you invest today $1,000 in the S&P 500 index and you would have an annual growth rate of 10%. In year one, you could get $100 due to the annual growth of 10%, giving you a new fortune of $1,100. In year two, you would earn 10% on the larger fortune of $1,100, which is $110—giving you a new fortune of $1,210 at the end of year two. This calculation shows you the effect of compound interest, which is also called interest on interest and it highlights the result of reinvesting interest. This data points out how important it is that you give your money time to grow.
5. You focus on a time period and not a point in time
Day trader try to perfectly time buying or selling stocks but it is usually impossible to find the perfect moment to buy and sell. Instead of focusing on a certain point in time to buy or sell stocks, you should rather focus on the time period you want to invest. The longer the duration you invest, the more chances you give your money to grow, and the less you risk.
6. You benefit from the actions of short-term speculators
The market often overreacts to both good or bad news of the companies listed on the stock market. One of those reasons is the short-term speculators who buy in times of good news of the company and sell in times of bad news. This behavior of the short-term speculators can give you good buying opportunities as a long-term investor, because some companies can be available for a cheaper price.
7. You need to pay less taxes
Depending on the country you live in, you need to pay taxes on the profits you make when you sell the share of a company. However, if you buy a share with the intent to hold it forever (following the buy and hold strategy), you need only to pay taxes on the dividends you receive from the companies you have invested in.
The identification of excellent companies you can invest in is extremely important to be able to invest successfully on a long-term basis. Here you can find all currently available investment analysis.