7 Ways Long-Term Investments Promote Financial Growth

The post 7 Ways Long-Term Investments Promote Financial Growth by Marc Guberti appeared first on Benzinga. Visit Benzinga to get more great content like this.

Money doesn’t buy happiness, but it can give you more freedom. Many people look to the stock market when planning for their financial future, and long-term investments can help you achieve your financial goals.

A large enough nest egg allows people to retire earlier, and if you’re not retiring just yet, savings can provide greater financial flexibility. If you have to pay an expensive medical bill later in life, a large portfolio makes it more manageable. You can earn money at a job or by starting a business, but keeping that money in the bank ensures you lose purchasing power each year because of inflation.

This article will explore some of the top benefits of using long-term investments to grow your wealth.

How a Long-Term Investment Strategy Works

A long-term investor doesn’t think in days and weeks. These investors think in years and decades. They understand the power of compounding growth and what happens to a $1,000 investment if it grows by 5% every year for the next 10 years (it becomes $1,628.89). Some investors have an average annual return that exceeds 5%, but these types of returns usually result in more risk. Young investors can ride the ups and downs by focusing on what a company can become a few years in the future, while older investors tend to get more defensive and stick with blue-chip stocks. Long-term investing is a relatively passive approach after doing the upfront research to determine your criteria and make investments. Then, it’s a matter of monitoring your stock picks to ensure the fundamentals are still good.

7 Major Benefits of Long-Term Stock Investments

Long-term investing provides several advantages, especially if you get started early. Even if you’re late to the game, you can still benefit from long-term investing. Here are some of the reasons why.

1. Potentially Greater Returns

Investing can give you the opportunity to turn $10 into $15. However, this 50% return is extremely challenging if you have a one-year horizon, but if you have many years until retirement, it becomes more doable. In the previous example, with a 5% return, an investor’s $1,000 becomes $1,628.89 in 10 years. That’s not even considering the stock market’s historical highs.

The S&P 500 averaged an 11.34% annual return from 1980 to 2022 (8.1% annual return if adjusted for inflation). If you get an 11.34% annual return for a decade, your $1,000 will become $2,927.60. This is a buy-and-hold return that does not require you to actively trade in the market. 

2. Compounding

The 10-year examples in this article demonstrate the power of compounding. An 11.34% return in one year is great, but if you can maintain that rate consistently, your portfolio will become more sizable over time. Anyone can take advantage of compounding, but this principle is the reason many people are encouraged to start investing when they are young. If you maintain that 11.34% return over 40 years, your $1,000 will turn into $73,459.62.

3. Ride Out the Highs and Lows

The stock market experiences daily fluctuations that can lead to emotional trading. This approach can result in exiting positions early and missing the upside or locking in losses. You might get the timing right, but even if you do, you will end up spending too much time looking at your portfolio. 

Long-term investors are better equipped to manage the highs and lows. This group of investors accepts that they will lose money on some of their investments since even a blue-chip company can go down by 10% in a few weeks. A few red days don’t change their strategy as long as the long-term fundamentals stay the same.

4. Lower Capital Gains Taxes

When you profit from a stock investment, you will have to give some of that money to the government. But the government won’t ask for as much money if you held onto the asset for over a year before selling. This tax provision rewards long-term investors who believe that holding stocks for a year is the best approach. 

Short-term gains get taxed at the same level as your ordinary income, but this tax rate drops to 0%, 15% or 20% for long-term capital gains, depending on your ordinary income for the year. You will save money on taxes by holding onto companies and being patient with your investments.

5. Fewer Investing Costs

Long-term investing means fewer transactions and fees. Some brokerage firms charge a small fee for each trade. While many of these firms have stopped charging fees for people buying and selling stocks, options traders still incur fees for each contract they buy and sell. You can mitigate fees by working with a low-fee platform and if you combine that with long-term investing, you can save a lot of money in the long run.

6. Mitigated Risk

Every investment has risks. Even though the S&P 500 has delivered strong gains throughout its history, some of the years along the way have suffered from more volatility than others. Nevertheless, a long-term approach can minimize risk by giving your assets more time to recover during economic downturns. 

If you buy dividend stocks that continue paying their shareholders, you can reinvest the dividends to capitalize on lower share prices. This reinvesting strategy, combined with consistent contributions, helps investors mitigate risk and rebound sooner. 

7. Less Stress

Long-term investors don’t check their portfolios each day. Weekly and monthly price movements don’t faze these investors because they are more concerned about what their portfolios will look like in a few years. Long-term investors prioritize a company’s fundamentals over the day-to-day stock price.

Some investors comb through investor relations pages and data compiled on several sites to stay updated on the fundamentals. However, it can be much more efficient to employ an artificial intelligence (AI) investing assistant. AI-assisted investing provides quick access to important information about your stock picks and act as a personalized investing guide.

Who is a Long-Term Investment Strategy Best For?

A long-term investment strategy is optimal for any investor who wants a less risky path to retirement. Setting long horizons gives your portfolio more time to recover and experience the benefits of compounded growth. Young investors have an advantage in this type of investing because they can wait longer for compounding to work its magic. Building financial security early on gives you more choices later in life. Feeling penny-pinched during retirement is a tough feeling, and young investors can avoid that fate by getting started early. 

Keeping the Big Picture in Mind

Long-term investors buy companies with the intent of holding onto them for several years. They don’t panic because of short-term price movements and only make adjustments if a company’s fundamentals change significantly. The ups and downs are part of any investor’s journey, and it is important to stay focused. 

AI-assisted investment tools make it easier to receive guidance and access information with a single query instead of several Google searches. You can get real-time insights on a company’s fundamentals or funds that fit your criteria instead of searching for them on the web, which can be like trying to find a needle in a haystack. When you keep the big picture in mind and invest in companies that align with your financial objectives, investing becomes easier and less stressful.

Frequently Asked Questions

The post 7 Ways Long-Term Investments Promote Financial Growth by Marc Guberti appeared first on Benzinga. Visit Benzinga to get more great content like this.