Long term investment involves investing for a period of years or even decades. It can be a great way to achieve your financial goals. It can also help you avoid making suboptimal decisions based on short-term gains or losses. In an age of TikTok length attention spans, it can seem impossible to think in terms of decades.
Peace Of Mind
One of the biggest benefits of long term investment is peace of mind. Rather than constantly monitoring and reacting to market fluctuations, long-term investors can keep their heads down, avoid emotional decision making, and focus on the overall goal of achieving financial freedom.
In the context of psychology, peace of mind refers to a state of psychological well-being that encompasses positive emotions, life satisfaction, a sense of purpose, and resilience in the face of hardship. The concept is often promoted through practices such as meditation, mindfulness-based techniques, and other cognitive-behavioral interventions that aim to foster a sense of inner calmness and well-being.
As long as you invest wisely, you can enjoy the peace of mind that comes with knowing that you have your money safely tucked away for the future. This means diversifying your portfolio with a wide variety of safe investments, including stocks, bonds, real estate, and precious metals. This helps to reduce volatility and ensure that your retirement funds will grow in a healthy, steady manner.
Compounding Interest
Compounding is a powerful tool for helping savings grow more quickly, or – when it’s applied to debt – for making payments more manageable. It works when interest is calculated on not just the original principal, but also on the accumulated interest from previous periods. Compounding can occur in saving accounts and some investments that earn dividends, or it may be a feature of loans, such as credit card debt.
The key to compounding is time. Those who start saving and investing early will likely wind up with far more in their retirement account than those who wait. Check out this example to see how much the difference can be: To calculate compounding, you need to know your starting principal, your interest rate and the frequency of compounding (daily, monthly or annually). You can find all these values in a table or calculator. The more frequently interest is compounded, the faster your balance will grow.
Taxes
When investing long term, the goal is to see your investments grow. This takes time and patience as you don’t get the instant gratification of short-term investing. Investing long-term helps you reach your financial goals, whether that’s buying a new home in a few years, saving for retirement or leaving a legacy behind for your kids. Depending on your goals, it may be worth the longer wait for better returns than you would receive with short-term investments.
When you make a long term investment, any gains are taxed at lower rates than short-term capital gains, which are typically taxed at your regular income tax rate. That’s one of the reasons it’s best to avoid churning your investments, constantly moving them in and out of different assets, as this can trigger high short-term capital gains taxes. Long-term investing is a great way to grow your wealth and meet your financial goals. For more information on how to invest long term, speak with a SmartAsset financial advisor.
Risk
When you invest long term, you’re committing to not pulling out of the market after each downturn and letting your portfolio ride out any ups. This allows the potential for compound growth to help you recover any losses and potentially add to your gains.
This type of investing is typically aimed at reaching major life goals that are further out into the future, such as retirement or college savings. You can also choose to invest for a shorter time frame (short-term investment is generally considered to be less than 10 years), and introduce investments with more volatility into your portfolio.
Understand your risk tolerance and the limits of your financial comfort zone before deciding whether long term investment is right for you. Keep in mind that all investments can lose value, and the amount you ultimately get back could be lower than what you invested. That’s why it’s important to diversify your investments and not put all of your eggs into one basket – otherwise known as concentration risk.
What’s Next?
Whether you’re saving for retirement or your kids’ college tuition, a long term investment strategy can help you reach your goals. Investing over the long term can help smooth out volatility. But it’s important to keep in mind your investing timeline and your risk tolerance.
