For many, long-term investing provides a path to wealth that has plenty of benefits along the way. To give you some more insight into these benefits, we’ve put together a quick overview of the most important ones!
- Compound growth is the reason many investors see success with long-term investing
- Investment returns, time, and additional contributions work together to drive compound growth
- Because long-term investing takes place over many years, investments are more likely to “ride out” any negative changes in the market
- When you have a long-term view, by setting investment goals, you can improve the likelihood of holding onto better-performing investments
- Long-term strategies require less time and money to implement, plus you can take advantage of strategies such as dollar-cost-averaging
Watch your money grow
The main goal of investing is to grow your capital, and by having a long-term view, this is very achievable through something called compound growth.
Compound growth is what happens when you continually reinvest returns. So that each year, the amount you’ve invested is an accumulation of previous years’ returns and your own contributions. By doing this, your funds begin to grow at an ever-accelerating rate (assuming steady returns). For example, if you invested €20 000 across 20 years (while reinvesting returns) that compounded annually at an average rate of 8%, you would accrue over €35 000 in returns in total.
The main factors that drive compound growth are:
- Return rates
The higher the rate of return, the more potential there is for your money to grow. And when it comes to investing, you’re already at an advantage, as return rates are typically higher than those offered by banks for a savings account which are currently below 1% in the Euro area1.
- Additional contributions
It’s the practice of reinvesting returns plus making regular contributions that significantly increases total returns over time2. Even small regular contributions can make a big difference, especially over 10-20 years.
Growth will continue to accelerate the longer you invest and reinvest. So, the earlier you start, the more of this benefit you get to enjoy!
Worry less about day-to-day performance
Investment performance is rarely smooth sailing, and over long periods, you’re likely to experience many ups and downs. But the beauty of long-term investing is that the longer you stick it out, the more likely you are to ride out any negative changes in the market. And because of this, investors often go for more moderate to aggressive investment strategies that include assets with better potential returns such as:
- Shares (also known as stocks or equities)
- Real estate or REITs
- Medium and long-term bonds
- Alternatives such as loan-backed securities
When investing in these types of assets, an important success factor is diversification – an investment strategy that lowers the chances of your whole portfolio being affected by negative market changes. Even small amounts of diversification have been proven to greatly improve the long-term results of compound growth3. On Mintos, for instance, we’ve seen that investors with highly diversified loan portfolios tend to achieve more stable returns on average.
Benefit from having long-term investment goals
With a long-term view, you can set big-picture goals. Researchers have seen that many investors, regardless of experience, tend to sell successful investments while holding onto losing ones – something called the “disposition effect”4. This happens because we’re influenced by many things when making investment decisions: our jobs, where we live, and the media5. A study on this effect showed that investors were 50% more likely to sell successful stocks than losing stocks – resulting in lower returns over time5.
A proven way to reverse this effect, however, is by setting investment goals4. They help you focus on building future wealth, and importantly, avoid the temptation to sell those winning investments as soon as there’s a change in the market.
Learn more about how investment goals might potentially lead to increased returns.
Save on time and money
Unlike active trading, long-term investing strategies don’t have to take up all of your time. Now, many investment platforms offer simple, pre-made investing strategies that you can essentially “set up and leave”. On Mintos for example, we’ve created 3 pre-defined investment strategies based on best practice investing principles and in-depth market analysis. All you have to do is set a target amount for your strategy, and let the algorithms do the rest!
Furthermore, with longer-term strategies, you’re less likely to trade your investments, which can result in significant savings in platform and trading fees. And you may also benefit from tax advantages, as long-term capital gains tax is often less than short-term.
Long-term investing also allows you to practice dollar-cost-averaging which is when you invest equal amounts at regular intervals. It’s not only a great way to build long-term wealth, but it also reduces the chances of making badly timed one-off investment decisions.
It’s never too late to start investing in your future. If you’d like to learn more about loan-based investments, you can check out how investing on Mintos works.
This is a marketing communication and in no way should be viewed as investment research, advice, or recommendation to invest. There is no guarantee to get back the invested amount. Past performance of financial instruments does not guarantee future returns. Investing in financial instruments involves risk; before investing, consider your knowledge, experience, financial situation, and investment objectives.
- European Central Bank (Accessed 2022) Bank Interest Rates – Deposits in the Euro Area
- Rubin, H.W & Spaht, C.G. (2018) Quality Dollar Cost Averaging Investing Versus Quality Index Investing | Journal of Applied Business and Economics Vol.20(6)
- Farago, A. & Hjalmarsson, E. (2019) Compound Returns | Department of Economics, University of Gothenburg
- Wierzbitzki, M., & Seidens, S., (2018) The Causal Influence of Investment Goals on the Disposition Effect.
- Barber, B. M., & Odean, T., (2011). The Behavior of Individual Investors.