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Why long term investing works

Sep-03-2018Blog by – Mr. Ashish AjmeraRead Time: 5 Min.Word Count: 102587 Why long term investing works

Long term investing was been a widely known and extremely popularly used strategy by the equity market investors over the decades. A well known way to park the hard earned money into companies with excellent potential to grow over the years to come, long term investing has been hugely idealized by investment legends like Warren Buffet. Buying good companies at a attractive valuations and holding the stocks for a long period of time has been a tried and tested approach. Buffet famously stated that an investor has to only buy something that he would be perfectly happy to hold if the market shut down for 10 years.

What does it mean for common investors? Does it make sense to park your funds in shares for that long a period of time? Long term equity investing basically lets investors make a profit by investing in companies that have the ability to profit from secular and far reaching trends not just in economy but across the society. These are companies that can take advantage of trends that go far beyond the regular business cycles of boom – bust. In a nutshell, long term investing mirrors the changes in society and the human life. Because of gigantic scaled changes in technology, human behavior, demographic and economic trends, companies tend to see massive productivity gains, in turn amassing multifold rise in their share prices.

Here is how investing in equities for a long period results in good returns and helps investors ride over short term volatility.

Systematic Saving habits: Long term investing inculcates healthy saving habits and thus, it is recommended that investors should start parking their investable funds right from an early age to reap windfall gains over the period. While there is a possibility that some of your investments may go the other way round and will not generate the desired returns, the lessons learned will not be futile and would lead to a more cautious and sensible approach not just to share market investing but to the entire money saving and spending affairs.

Benefits from Dividend/Bonus issues: Remember that long term investing it like partnering with a business. Unlike a short stint with your money, you are looking to participate in the real growth story of the company. This enables you to benefit from multitude of corporate actions like dividend and bonuses. A highly profitable company would reward the investors with a fair share in its earnings via generous dividends. Bonus and or buybacks are also excellent wealth creators.

Ride over volatility: Volatility is basically the hyper sensitivity witnessed by stock markets over shorter periods due to various factors like economic news, company updates, global sentiments etc. Volatility often makes investors restless and at times, makes emotions get the better of us. Such bouts of market movements keep on their edge and can lead to panic selling, thereby cutting potentially profitable investment holdings. Long term investing take care of this hesitancy and in turns acts as an effective way of managing investor expectations in a more nuanced manner.

Also Read: Here’s why soaring oil prices might not dent you...

Taking care of Tax matters: Holding a security for longer term normally leads to reduced tax liability for an investor. This in turn provides a much better compliance and keeps tax issues limited. Effective financial year 2018-19, long term capital gains arising from sale of equity shares are proposed to be taxed at the rate of 10% on a gain exceeding 100,000 without allowing any benefit of indexation. However, all gains up to 31st January, 2018 will be grandfathered. Meanwhile, the short-term capital gains earned on transfer of equity shares held for a period of less than 12 months is subjected to tax of 15%.

Less cost of investing: Cost of investing is less in case of long term investing. When one buys or sells shares or any other financial security, one has to pay brokerage along with other charges. Long term investing brings down this cost significantly as the number of transactions comes down and the gains generated via capital appreciation are more than sufficient to make up for transaction charges. You can find a good share broker online and compare the brokerage charges before deciding to open an account.

Power Of Compounding. Power of compounding is popularly called as the eighth wonder of the world. Buying stocks for the long term allows you to take advantage of compounding, or the ability to reinvest your dividends over time to generate even greater profit at the end of a sizably long time period. If reinvested back into more shares of the same stock, your investment would lead to a handsome amount of return.

Conclusion:

When you buy a particular company’s stock for a long term, say around 10-15 years or even more, you should think of yourself as a partner in the business till your investment objectives are fulfilled or till you genuinely need the funds. It is important to be selective in your approach while taking such investment decisions. Normally, companies making products that have a very high endurance and massive use base, a strong balance sheet, less competition and a sound track record of innovation would do well over the longer term. Once you decide to become a long-term investor, you will need to work out strategies based on your tolerance levels and expected returns. However, it is a relatively easier option and the costs are minimal. You can easily start investing by selecting the best online investment broker who offers ease of transactions and good service.

Here is a quick math to understand the attractiveness of long term investing. The BSE Sensex recorded a CAGR of 21% between 1980 to 1990. The index grew at a CAGR of 15 in next decade and has delivered a return of 13.5% in the 21st century. Over last 38 years, the SENSEX has grown at an impressive pace of 16.50%. This does not include the gains accrued from dividends and other corporate actions like bonuses/stock splits. Thus, the waiting game seems to be paying off well for the local stock market participants.

Also Read: What Is Volatility And How Investors Can Beat It

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