In today’s unpredictable world, the stock market is difficult to follow. For those who are not involved in day trading, watching investments move dramatically can be anxiety-inducing. Instead of reaction with panic, patience can be helpful according to JourneytoBillions. Taking a long-term view of the stock market can pay better than having knee-jerk reactions.
If you are looking to make a quick buck, long-term investing might not be your thing. But, if you are trying to build your retirement fund, long-term might be your best bet. There are several advantages to investing in the long-term. Here’s why:
1. Interest compounds
When you invest for the long term, you get to benefit from interest earning more interest. Compounding interest is like earning free money on free money. All you have to do is make an investment, wait for interest to accrue, then let more interest pile up. If you withdraw money too quickly, you do not get to benefit from compounding interest. With stocks and compounding interest, your investment is reinvested into more shares, so you have a higher stake in your favorite companies.
2. Proof is in the data
It’s difficult to argue with numbers. When you plan for your investments to go the distance, data shows that you are likely to make money. Stocks have a 50-50 chance of increasing or decreasing in value. They cannot drop below zero, but no business has a cap on success. If you keep letting your well-planned, high-quality investments grow, over time, data shows that your bottom line should increase.
3. Mistakes can be fixed
When you are investing as a day trader, you don’t get to fix mistakes. Whatever happens immediately affects your investment, whether good or bad. But, when you invest to make money over several years, you can fix mistakes. If your stocks drop, there is always the possibility that they will go back up again. Not every day will be a good day, but strong businesses know how to protect themselves from bad days and they often find ways to recover so their investors win in the long run.
4. Risk decreases
Day traders have to pay close attention to the market. If they don’t, they could miss financially rewarding opportunities. But, when you are in the stock market for the long run, your money is in the market when big opportunities arise. Granted, it’s also there when bad things happen, but hopefully the good will outweigh the bad. Some investors who had their money in the stock market between 1993 and 2013 earned more than 400% on their initial investments. That’s a tough number to beat while day trading.
Investors who are constantly moving their money in the market pay a notable sum of money in taxes. However, investors who wait out their investments pay a significantly less amount. Long-term capital gains taxes have a cap that is lower than short-term marginal tax rates. When you are trying to make the most money, you don’t want to pay a large percentage of it in taxes.