The Pros of Long Term Equity Investment
In the midst of Brexit and the appointment of a new Prime Minister, there is an inevitable air of uncertainty in the UK. However, it is important to remember that there is always something going on that means the future feels less than assured.
As a result, people can be hesitant to make longer-term equity investments, partially for fear of these investments not coming good and partially because they are unwilling to sacrifice a chunk of money today for returns in the future. This logic tends to be flawed when you look at all the benefits of long term investment.
Benefits of long term investment
Peace of mind
Seeing the market jump or fall 10% in three days can be thrilling or terrifying and leave you sitting on the edge of your seat, wondering what will happen next. With long term investments, these fluctuations cease to matter and you can instead focus on the long term growth outlook of your investments. No panicking necessary.
Compounding comes into play
Compounding is when you reinvest your profits (i.e. dividends) over time to generate even greater profit potential. Time is on your side here as reinvesting a mere 3% can make a huge difference to how much you will have for retirement, for example. Finance journalist Sean Williams*, gives the following example: “pocketing a 3% yield will double your money about every 33 years, assuming no dividend or stock price growth. If reinvested back into more shares of the same stock, your investment would double in almost 10 fewer years.”
A solid return
Although there are never any guarantees with investing, if you align your portfolio for the long term, you’re more likely to make money. This is because even though stocks have an almost 50-50 chance of rising or falling on any one day, they can only fall to £0 if a company goes bust, but they can rise infinitely. Put simply, if you allow the stocks that are doing well to grow over a longer period of time, your portfolio will increase in value.
Although it may be tempting or seem smarter to jump in and out of the market as it shifts, this method leaves you potentially missing out on big up days. “A study compiled by J.P. Morgan Asset Management using data of the S&P 500’s largest moves between Dec. 31, 1993 and Dec. 31, 2013 showed that staying invested all 20 years would have netted a 483% return for investors of the broad-based index. Missing just the 10 biggest moves up in that timespan would have cut your return to just 191%.” What this translates to is, staying invested usually reduces your risk of missing out on the big gains.
Low interest rates
According to The Independent*, “The average UK saver who kept their money in easy access bank accounts lost almost £500 in real terms last year because inflation has continued to outstrip interest rates, according to new research.” Investing long term in stocks rather than keeping money in easy access accounts has shown to be generally safer and more rewarding in times of low interest, times that we are going through in the UK currently.
To put this into context, here are two examples of potential long term investments that would have garnered excellent returns for the mere price of one of their products.
The first iPhone launched in America in 2007 and cost $499. Say, for example, you bought two, one for you and one for your teenage child, that would have cost you close to $1,000. If, instead of buying the iPhone, you had invested that $1,000 in Apple itself, ten years later those shares would have been worth $7,200.
Similarly, think about how many items you order from Amazon in a year – plus your £79 Prime Membership. It’s highly likely it crosses over into hundreds of pounds. If you had invested $1,000 in the company in February 2009, your initial outlay would be worth more than $23,600 today.
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This article is for information only and must not be considered as financial advice. We always recommend that you seek independent financial advice before making any financial decisions. Investments can go down as well as up and you may get back less than you invested.
gpfm are an independent financial planning company dedicated to the provision of personal, professional and objective-driven advice for our clients. We have been awarded the Chartered Financial Planners title by the Chartered Insurance Institute for offering high quality, independent and informed advice that meets the needs of our clients.