Why is long term investment important?
How long can you focus on something? It was a revelation when a study in 2018 stated that an average human has an attention span of just 8 seconds. If it seems to you that these attention spans do not matter, then you're wrong because it has significant implications on your daily activities and decision making.
It can be easily proven. Take the stock market, for instance. As per the NYSE, the holding period for stocks ranges from 11 seconds to 14 months in 2018 whereas it was 100 months in 1960. This again dropped to 5 years in 1970 and the holding period saw a downfall over the years.
Talking locally, India also comes across as a country where people feel that trading for more than two to three months is painfully long. Some people tend to take concentrated bets and practice long term investing but bad times or an extended bad market eventually shakes their belief.
What is better- short-term or long-term investing?
Both Shorting (or Intraday trading) and long-term investment have their specific pros and cons. The final call depends on what is suitable for the investor based on the following:
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Time commitment: Short-term trading demands a lot of attention and time. It requires continuous monitoring of the market to make the buy or sell decision. On the other hand, long-term investment is not time-consuming daily. After entering the trade, you hold it for a long time as you already have a pre-decided exit price and stop-loss price.
- Capital Availability: For intraday trading, brokerage fees are much higher as buying and selling of stocks happen on the same day, whereas for long term investing, the brokerage charged is just a one-time fee. For a long-term investor, the amount of capital required for investing depends on the preference and likeability of the investor.
- Personality: Intraday trading and long term investing require patience, discipline, and immense knowledge. The possibility to be swung by fluctuating prices and opportunities is much higher in intraday traders. Thus, an excellent strategy and understanding of the market are needed in this.
- Compounding: Long-term trading takes benefit from the power of compounding. In long term trading, there is a good chance that you might miss out on the volatility of the market to make money. But, in intraday, there are possibilities which might make you lose a good amount of money due to the volatilities in the share markets.
- Risk & Return: The most crucial factor is the risk and the return. Intraday trading can give high returns but involves taking higher risks. The returns might not be steady in short trading until the strategy is perfect. In long term trading, the profits take time to grow, but they are consistent, and long hold on dividend-paying stocks also turns out to be profitable. Thus, there are higher returns and lesser risks in long term investing. The taxes for long-term investing are also minimal as compared to the taxes for intraday trading.
Conclusion
There’s a general logic which is also true – Higher Returns attract Higher Risks. In case of short-term investments, risks are higher and returns could be lower whereas it’s completely opposite in case of long-term investments.
The investment looks better, with higher returns and lower risks.
We, at Finology, believe in long term investments because that’s of course a better option!
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