The Advantages of Long Term Investments…

The advantages of long term investments, specially in stocks, is unparalleled.

Do you maintain long calls in stocks?

If not, you must. It is like a fool-proof way of investing in stock market.

In this article we see some advantages of staying invested for long term.

Sensex recently touched its all time highs. On 29th Jan’18, Sensex was at 36,200 levels.


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I have been watching the market since 2008.

Back then, when market crashed to 8,500 levels, no body thought that it will touch these heights.

Investor who invested in 2008-09’s market crash saw their fruits ripe.

Since 2009, the stock market has seen a consistent up-trend.

The index climbed from 8,500 to 36,000 levels in 10 years (growth of 15.59% per annum).

What is the lesson here for new investors?

After one has bought stocks, patient waiting (for long term) will give its rewards.

It requires courage & conviction to stay invested to stay invested when market is at all time lows (like in 2008-09).

So it is so easy? Just stay invested in stocks and earn 15.59% returns?

No, to earn such high returns it is also essential to time the market.

The advantages of long term investments -1

#1. Timing the market

There are not many investors around who could enter the market in situations like 2008-09.

But such investors saw their stock portfolio grow multiple times (4.25 times) in 10 years.

Investors who stayed away in 2008-09 are now wondering if this is the right time to enter the market (Sensex around 35,00 levels).

It is a dilemma for all new entrants.

Whether to enter now or wait for another market fall like 2008-09.

There is one golden rule for ‘untrained investors’. Always avoid investing in market peaks.

How this can be made possible? By learning how to time the market.

What must be done to time the market?

Timing the market needs a kind a skill that is absent in majority.

What is this skill?

Identification of fundamentally strong stocks trading at at undervalued price levels. 

This way, market timing will automatically happen.

[I use my stocks analysis worksheet to identify undervalued stocks]

So this is the only way of timing the market? There is no other way?

Yes there is an easy way. Avoid market peaks.

Avoids market peaks, buy stocks during price falls, and stay invested for long term.

If it is so easy, why many people do not practice it?

In a short term we face lot of volatility in stock market. The price of individual stocks (or of Sensex as a whole), fluctuate violently.

This short term volatility makes people sceptical and confused about the market behaviour.

This is one main reason what keeps people away from realising the advantages staying invested for long term.

Due to short term volatility, people get impatient and sell short.

In sheer panic they sell and lose the chance to experience the advantages of long term investments..

#2. Advantages of long term investments in India

When we say long term investments, we mean holding time of minimum 7-10 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 nascent stage. If India wants get any where close to America and Europe, it will require a big leap.

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 even surpass them.

If only our political system start to help more the India Inc, the future growth can be assured.

Myself as a common man and an equity investor, sees fantastic advantages of staying invested for long term in India.

Apart from this long term view about India, lets see few advantages of long term investments in general:

#2.1. It lets you forget short term volatility

You can invest for long term and forget short term volatility of the market. Price movements becomes more predictable in a long term horizons.

Stock prices remain very volatile in short term. Hence people find it very risky to invest in stocks.

But same stocks behave very predictably when seen in long term time horizons.

Below is the price chart of Tata Consultancy Services (TCS) of last 15 years.

Observe this chart and visualise yourself that in long term TCS price has only moved up.

But in short term, even such a fundamentally strong stock has displayed extreme volatility.

The advantages of long term investments -3

#2.2 It is more tax effective

Out of all the advantages of long term investments, one this which is most established is its tax handling.

Long term investing is more efficient in terms of tax liability.

What we mean by being tax liability?

All type of capital gain earned in investments attracts income tax as below.

  • Short term investing – attracts STCG (Short term capital gain tax).
  • Long term investing  – attracts LTCG (Long term capital gain tax).

Broadly all capital gains are classified into two broad categories, STCG and LTCG.

STCG is taxed more. LTCG is taxed less.

Check this link to know what tax rates are applicable on long term investments in India for equity, debt & real estate investment options:

[Read more about Long term capital gain (LTCG) tax here]

#2.3 It is more cost effective

Frequent buying and selling of stocks proves costly.

Every time we transact, we end up paying brokerage, commissions, taxes etc.

Hence buying and holding for long term seems to be the better alternative.

But talking about stocks in particular, is it ok to buy any stock and hold it for long term?

No, one cannot afford to buy any stock.

The check points can be as below:

  • So better strategy is to do a good stock research first.
  • Pick the best stocks which looks fundamentally strong
  • The picked stocks must also be undervalued.

[I use my stocks analysis worksheet to identify undervalued stocks]

Buy such stocks, and stay invested for long term.

This not only minimises the extra cost but also helps in taking advantage of the power of compounding.

[Read more about minimum amount to invest in share market]

The advantages of long term investments -2

#2.4 It lets you experience the power of compounding

Long term investment advantages is felt best with power of compounding.

Lets see an example.

Suppose you want to accumulate Rs 1.0 crore by the time you are 60 years of age.

#Case 1: Present Age 25 (No investment)
  • Time in hand : 35 years
  • Rate of Return : 0%
  • Monthly contribution required: Rs.23,810
  • Corpus at end of 35th year – Rs.10 Crore
#Case 2: Present Age 25. Investing in Equity. ROI @15% p.a.
  • Time in hand : 35 years
  • Rate of Return : 15%
  • Monthly contribution required: Rs.700 (only).
  • Corpus at end of 35th year – Rs.10 Crore

[Note: Do not be surprised. The difference between not investing and investing is so huge (Rs.23,810 becomes Rs.700)

#Case 3: Present Age 30. Investing in Equity. ROI @15% p.a.
  • Time in hand : 30 years
  • Rate of Return : 15%
  • Monthly contribution required: Rs.1,427.
  • Corpus at end of 35th year – Rs.10 Crore

[Note: A 5 year delay caused the monthly contribution to jump from Rs.700 to Rs.1427 (up by >100%)]

#Case 4: Present Age 35. Investing in Equity. ROI @15% p.a.
  • Time in hand : 25 years
  • Rate of Return : 15%
  • Monthly contribution required: Rs.3,050.
  • Corpus at end of 35th year – Rs.10 Crore

[Note: A 10 year delay caused the monthly contribution to jump from Rs.700 to Rs.3050 (up by >300%)]

If you want to achieve the goal in 25 years, you must invest Rs.3,050 per month.

If you want to achieve the goal in 30 years, you must invest Rs.1427 per month.

If you want to achieve the goal in 35 years, you must invest just Rs.700 per month.

What these example tell us about the power of compounding and long term investing?

By staying invested for longer terms, investment load per month get minimised.

This happens because of the power of compounding of money.

[Read more about the power of compounding here]

The longer one keeps money invested, the faster it will grow.

The advantages of long term investments -4

Invest like a an expert investor

Qualified investors very rarely makes loss in stock market. Why?

Because they invests in stocks after thorough stock analysis.

One the other hand, lay investors invests on basis of advice and speculation. But its not the fault of lay investors.

Stock analysis is a specialised skill. Unless one has trained themselves, it is not possible to practice stock analysis.

So how common investors like you and me can invest in stocks?

[I use my stocks analysis worksheet to identify undervalued stocks]

The answer to this dilemma is ‘practicing long term investments‘.

Even investment Gurus like Warren Buffett believes in the advantages of long term investments.

Long term investment is so effective that even an untrained investor can defeat an expert by using it.

Investing in a good diversified equity mutual fund through SIP and 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.

Conclusion

Long term investment implemented systematically can yield high returns.

Making money in stock market can be made easy by practicing long term investing.

Starting a SIP in a good diversified equity mutual fund is a first step.

Keep contributing to this SIP for as long as possible (like 20/25 years).

The wealth that be generated this way is unmatchable.

The advantages of long term investments are so so conclusive that no other investment strategy can match its effectiveness and simplicity

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-analyse all securities before investing in one.

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