Long term investing postulates a certain amount of patience. It does not involve running after the hot picks and making quick bucks, or, eating hot cake and burning the mouth. At the same time, it does not mean that you should not search for high value stocks which can be hot stocks as well. Long term investing mostly implies walking like the fabled tortoise that defeated the hare in the long run.
Time, patience and diligence are stock investors’ best friends. Long term investing results in compounding effect in increasing the wealth. Compounding is a mathematical process where the interest gets added to the principal amount which in turn earns more interest. Over the time the initial investment multiplies phenomenally. We have many more Long Term Investing Help Articles Now Available.
The compounding effect can be illustrated by an example. Let us assume there are four persons each aged 25, 35, 45 and 55 respectively. Each one of them invests $1,000 at 8% return per year till the age of 65 when he will get back his accumulated money. Let us assume:
The first investor starts at the age of 25 and earns over $292,500
The second investor starts at the age of 35 and earns $125,000
The third investor starts at the age of 45 and makes $49,400
The fourth investor starts at the age of 55 and makes just $ 15,350.
The results are surprising. The income made by each earlier investor speaks for itself. It is quite clear from the above data that the youngest investor make the most of his investment. The earnings of the second starter are much less than half of the first one. The earnings of the third investor are a little more than one third of the second and they are three times higher than the fourth investor.
There can be a different perspective of looking at the investment scenario if you have a long term plan. Suppose each one of the above investors plans to make
$37,500 by the age of 65, how much will he have to invest per year? The rate of return remains 8% ignoring the taxation and inflation.
The first investor who starts at 25 has to invest a measly amount of around $106 per month. The second starting at 35 has to invest $250 per month. The fourth has to invest a huge $2035+ per month. The conclusion is evident. The earlier you start, the less you have to invest every month to achieve your goal.
The above example is just hypothetical. Many unprecedented problems can crop up in real life situations. The interest rates may vary because of a number of factors. There may be times during the decades when your money may earn more and at other times it may make less.
You may also be forced to make corrections for the mistakes that you may have inadvertently made in your calculations. You may have thought that a particular stock may soar like an eagle, but it turned out to be slower than a turkey. You may still look for better alternatives even if those you chose were doing pretty well.
The way to avoid suffering losses and making corrections is to diversify your portfolio. Moreover, since your portfolio is diversified and you have invested only a small part of your investment in each stock, your loss will accrue only on a small part of your investment and not on the whole. If your investment in one stock suffers loss, you may make it up through your investment in another stock. This facility to make changes can be easily available only to the early investor.
What will happen if the investor starts investing at the age of 55 and somehow his plan goes awry because of the downturn of the market? The results can be disastrous. There is not much room for correction within a period of only ten years before you retire at 65.
The truth about stock market is that it may go up and down without any warning. Those who invest early have a better chance of riding over the bad times and making the best of the periods when the market goes upbeat.
It must, however, be noted that if you have invested in a market leader with a high value stock, you should not fall in love with it. If its price starts falling, you must become extra watchful about the cause of its fall. If you think that the fall will continue, you must sell it off without yielding to your emotions of love, greed or fear. We have many more Investing Help Articles Now Available.