It is not a secret that we prefer long term investments. (Even the name of the site suggests that.) So let’s see 3 reasons why we do so.
1.) It may cost less
Invesments always have costs, especially when you allocate your money to a new instrument. The more often you reallocate your money, the more often these costs occur, which can eat up your profits easily. (Eg.: you pay commission when you buy a stock, and there are also expenses when buying a flat as an investment.) So if you keep your investments for years, you won’t have to pay for reallocating, saving lots of money. (However other fees may still occur.)
Note: Even if I am not a daytrader, there was a time when I often got calls from my bank like “we have a very interesting investment opportunity, only for you, for a limited time…”.
They do this, because the bank’s income depends on how many times they can charge your account for commissions when reallocating your money and not on how much profit you make. Your bank wants you to switch between investments as often as possible. So do not be mislead: what they only know for sure is that if you switch to their investments, they will get their commission (I hope, nobody needs to be reminded after seeing Wolf of Wall Street, however, I thought it is better to note this. The bank always wins.)
2.) The risks can be a lot lower
It is often said, that long term investments carry less risk than short term ones. To see if it is true, we have implemented a couple new chart-types – you can see some examples among the Dow Jones 10 year chart section with explanation, too.
However, the rule of thumb “long term risks are lower” can be misinterpreted easily.
It does not mean, that every investments will result in positive returns in a long enough time. There are definitely bad long term investments, as well as good ones. (Just think about companies that went bankrupt. Their shares never going to worth anything again.)
It rather means that the longer you wait the more likely it is that you can achieve the awaited returns. Eg.: investing in a stock for a day may have very random results as it depends on so many factory, while investing in a stock for 5 years depends rather on the company’s fundamentals – which can also be good, or bad.
It is also important, that even if long term risks are lower, it does not apply to all instruments equally – that’s why it’s worth to compare the charts we mentioned above.
3.) It takes less time
There are many ways to invest.
If you make a long term investment, it takes time to select your instrument carefully (maybe an investment advisor can help), but after that it requires little attention. If you invest in Dow Jones, it is only up to you how often you check eg.: Dow Jones 10 year chart. In case of real estate, you collect the rent every month, check if the tenants have not damaged your property, and solve problems like repairing the lock – which take a couple hours a month.
If you compare this to the way a daytrader “invests” (staring the screen for hours every day), it is obvious that long term invesments save you a lot of time. Even if daytrading is said to be quite profitable, it is rather another very stressful job, than “making your money work for you”, which we want.
So what type of investments do you like? Short term, or long term?
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