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What is a Long-term investment?
When an investor holds various kinds of assets, like mutual funds, securities, shares and/or stock for more than one year, it is defined as a long-term investment. An investment for exactly one year does not qualify as a long-term investment.
The usual periods for long-term investments are 3, 5 or 10 years. Long term investments are crucial tools and can help one accomplish their financial goals, but they do come with an element of risk and these investments should be done only after thoughtful considerations of the same.
You may be missing out on making the most of your investments if you’re only making short-term investments. Generally, it takes time for mutual funds to reach their pinnacle and they do so usually between 5-10 years, approximately. You need to give stock or mutual funds time to grow to ensure the most return on your investment.
Let’s discuss the advantages of long-term investments
There are many benefits of long-term investments. It not only helps to generate good returns but gives you ample time to correct any investment mistakes you may commit, which is bound to happen, especially for newer investors or for those who do not have a good enough understanding of the market they’re investing in.
Time – The more time you invest in the market, the more your chances of success. The probability of your financial success is directly proportional to the period you invest in the market.
Compounding – People who are new to the investment market may not know the power of compounding or may just perceive it as another share market or mutual fund jargon, but this is not the case. One needs to start early to take complete advantage of the power of compounding, and you may get surprising returns.
Diversification – Diversification is another great tool when it comes to investments. ‘Don’t Put All your Eggs in One Basket’ is a common saying, and this is something that can be applied to your investments as well. You can implement this strategy more efficiently with long-term investments as you will get the time to check your current investments and make systematic changes as per your portfolio.
Mistakes – Long-term investments give you time to analyze the performance of your investments. A beginner in the investment world may have a basic understanding of how and when to make trades, but they will make mistakes. Staying invested for the long term means a longer period to learn from such mistakes and improve your returns as well.
Risk – The risk of losing your investment in long-term investment plans is much lesser when compared to short-term investments. Fluctuations in the stock market in a short term are too frequent to be able to correctly evaluate the performance of your stock and/or mutual fund. You can lose your money in short-term investments due to fluctuations. With long-term investments, the price of your stock is destined to grow, and you will get the time to develop your portfolio. You will also have the time to balance out the losses if they occur. Page Break
Key takeaways:
- You will be able to reap more benefits in long-term investment
- Long-term investments are less risky
- Have enough time to diversify your portfolio
- Learn from the past mistakes, keep going ahead
- Start investing early to gain from the power of compounding
