Sensex recently touched its all time high. Investor who invested in early 2008-09 saw their fruits ripe. It requires patience and courage to invest when market is at all time lows (like in 2008-09). For sure, such investors are few who could enter the market in situations like 2008. For such investors long term investment advantages are huge.
Investors who stayed away in 2008-09 are now wondering if this is the right time to enter the market. It’s a dilemma for all new entrants, whether they should enter now or wait for another market fall like 2008. There is one golden rule for ‘untrained investors’ in stock investing ever try to time the market. Better strategy for untrained investors is to take the SIP route.
Timing the market needs a kind a skill that is absent in untrained investors. If one knows to identify fundamentally strong stocks trading at at undervalued price levels market timing will automatically happen. But for others timing the market is like wishful thinking. When a person buys stocks with long term perspective, he shall not worry about timing the market.
In process of investing, times like 2008 will eventually come increasing your average returns. Long term investment advantages are huge, its only required to practice it judicially. In a short term we face lot of volatility in stock market. This short term volatility is what keeps people away from realizing long term investment advantages.
Due to short term volatility, people get impatient and short-sell. In sheer panic they sell and lose the chance to experience the benefits of long term investment.
Long Term Investment Advantages in India
When we say long term investments we mean a time period of minimum seven to ten years. In Indian market scenario, long term investment advantages are most visible. India is a country which has loads of fundamentally strong companies. These companies has great growth potential as India Inc is on growth-trajectory. I personally consider that India Inc is still in its very nascent stages. If India wants get any where close to America and Europe, the required leap is very big. India is still sitting on very initial levels of achievement. I am sure India Inc will reach the levels of America and Europe and may be surpass. If only our political system start to help more the India Inc, the future growth can be assured. I as a investors sees fantastic long term investment advantages in India.
It is very common to see untrained investors making losses in stock market. But it happens? The main reason is bad timing? Untrained investors enters the market when they should actually exit. By the time untrained investors decides to buy stocks the market has already reached its peak. While untrained investors are buying stocks, market starts to correct. The stock prices begins to fall down. The main problem is wrong timing. But this does not mean that untrained investors shall start trying to time the market.When one is investing for long term, with a tool like SIP, occasional market corrections becomes irrelevant. Experts always say that there are immense long term investment advantages because of these reasons:
(1) Invest for Long term and forget about short term volatility
Price movements becomes more predictable in a long term horizon. There are stocks which are very volatile in short term. People find it very risky to buy such stocks. But same stocks proves to be an excellent option for a long term investor. Long term investment allows people to ignore short term volatility.
(2) Long term investments are highly tax efficient
If stocks are not sold for profit within one year of its purchase, profit is not taxed. Compared to other long term investment advantages income tax benefit is a smaller pie. But a person who does not understand other examples will surely relate to this benefit. Instead of investing in stocks suppose you invest in fixed deposit. The income generated from FD these days is not more than 8-9% per annum. On top of that the income generated from FD is taxed. So net of tax return of FD is between 5-6%. Compare this return of FD with stocks. Long term return of stocks is on an average 12% per annum and it is not even taxed.
(3) Frequent buying and selling of stocks proves costly
Every time we transact, we end up paying brokerage, commissions, taxes etc. So better strategy is to do a good research first. Pick the best stocks which looks fundamentally strong and undervalued. But those stocks at once and stay invested for long term. This not only minimizes the extra cost but also helps in taking advantage of the power of compounding.
(4) Long term investment advantages is felt best with power of compounding
Lets see an example. Suppose you want to accumulate Rs 1.0 crore. The investment that you selected will give you a average returns of say 15% per annum. If you want to achieve the goal in 5 years, you must invest Rs 1.12 Lakhs per month. If you want to achieve the goal in 10 years, you must invest Rs 37,000 thousand per month. If you want to achieve the goal in 20 years, you must invest Rs 6,700 per month.If you want to achieve the goal in 30 years, you must invest just Rs 1,444 Lakhs per month. So, by staying invested for long term, investment load per month get minimized. This happens because of the power of compounding of money. The longer one keeps money invested, the faster it will grow.
It will not be wrong to say that a informed and qualified investor never makes loss in stock market. Qualified investors invests in stocks on basis of analysis. While lay investors invests on basis of advice and speculation. But its not fault of lay investors. Stock analysis is a very specialized skill. Unless and until one has trained themselves, it is not possible to practice stock analysis. So how common investors like you and me can invest in stocks? The answer to this dilemma is ‘practice long term investment‘. Even investment Gurus like Warren Buffett believes in long term investment advantages. While lay investors dilutes this advantage by opting for short term gains.
Investment in stocks is like planting a tree. You can expect fruits form the tree only years after plantation and regular watering. Expecting a mango tree to start giving fruits within few months is not fair. Similarly investment of money is a long term activity. It will take a minimum of five to seven years to note visible benefits of stock investing.
To understand long term investment advantages, let me give you a example. Long term investment benefits are so strong that a lay investors can defeat an expert by using it. A lay investor investing in diversified equity mutual fund through SIP can outperform an expert. Point is, even if one does not know difficult stock picking strategies, simple SIP can help him defeat even the best in business.
Long term investment implemented systematically can yield high returns. Making money in stock market is easy. Practicing long term investing can be very profitable. Starting a SIP in a good diversified equity mutual fund is a first step. Keep contributing to this SIP for next 10 years can ultimately seal the profit. SIP is the tool that lay investors can use to experience advantages of long term investment.
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Disclaimer: All blog posts of getmoneyrich.com are for information only. No blog posts should be considered as an investment advice or as a recommendation. The user must self-analyze all securities before investing in one.