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Writer's pictureDamon C Collins, MBA, AAMS®, CFEI®

Do Long-Term Investing Work?


We all love to eat cakes, cookies, and pies. When baking one of these deserts, there will be different heat levels and, most importantly, different baking times. Of the three desserts—cookies, pies, and cakes—we can confidently say that the cake will take longer to be done entirely. Next will be the pie, and then cookies will be baked in the shortest of time. You can look at investing the same way. There is short-term investing, medium-term investing, and long-term investing. In this blog, I will focus on long-term investing and answer the question, does it work?


Plan and simple, the answer to the question is Yes: long-term investing works and is often regarded as one of the most effective strategies to build wealth over time. Below are key reasons why it works, along with insights on how to make the most of it:


Why Long-Term Investing Works


  1. Compounding Returns


    • Compounding means that your returns generate additional returns over time. Reinvesting dividends and profits allows your investment to grow exponentially.


    • Example: An investment earning 8% annually can double in about nine years through compounding.


  2. Market Growth and Economic Expansion


    • Historically, financial markets have grown over the long term. Stocks, for example, reflect the growth of companies and economies. While short-term volatility exists, markets tend to trend upward in the long run.


    • Example: The S&P 500 has delivered an average annual return of about 10% over many decades.


  3. Risk Reduction through Time


    • Volatility is higher in the short term, but market fluctuations tend to smooth out over extended periods. This reduces the chance of significant losses if you remain invested through market cycles.


    • Holding investments for 10+ years has reduced the likelihood of negative stock returns.


  4. Emotional Discipline and Lower Fees


    • Long-term investing helps avoid emotional decision-making, such as panic-selling during market downturns.


    • It also minimizes transaction costs and taxes, which eat away at returns in frequent trading.


  5. Dividends and Capital Gains


    • Holding investments over the long term allows you to benefit from capital appreciation and dividends, which can provide a steady income stream.


How to Make Long-Term Investing Work


  1. Diversify Your Portfolio


    • Spread investments across different asset classes (stocks, bonds, real estate) to reduce risk.


    • Use index funds or ETFs to gain exposure to various companies and industries.


  2. Start Early


    • The earlier you start, the more time compounding works in your favor. Even small contributions grow substantially over decades.


  3. Consistency is Key


    • Regularly invest through dollar-cost averaging (investing a fixed amount at regular intervals). This reduces the impact of market fluctuations.


  4. Stay the Course


    • Avoid trying to time the market. Stay invested during downturns since missing out on the market's best-performing days can significantly reduce returns.


  5. Rebalance Periodically


    • The value of certain investments in your portfolio may grow or shrink over time. Rebalancing ensures you maintain your desired risk level.


Example of Long-Term Success


  • Warren Buffett is a strong advocate of long-term investing. He advises investing in low-cost index funds, staying invested, and being patient. Buffett's fortune grew exponentially over time due to the power of compounding and sticking with long-term holdings.


Warren Buffet's Quote: "Someone's sitting in the shade today because someone

planted a tree a long time ago."


  • John C. Bogle, the founder of the Vanguard Group, promoted low-cost index funds as the best way to build wealth. He believed investors should hold diversified portfolios long-term to capture the market's growth.


    John Bogle's Quote: "Time is your friend; impulse is your enemy."



The Takeaway


Yes, long-term investing works because it allows you to take advantage of compounding, reduces emotional and transactional risks, and captures the economy's overall growth. It requires patience, consistency, and discipline, but it's a proven method for building wealth and securing financial stability over time.


 

The information herein is intended for educational purposes only and is not exhaustive. Diversification or any strategy that may be discussed does not guarantee against investment losses but is intended to help manage risk and return. If applicable, historical discussions or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax, or financial advice. Please consult a legal, tax, or financial professional for information specific to your situation.



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