Why Invest for the Long Term?

Investing can be considered as an easy task for anyone but generating the desired returns on your investments is not that simple.

- BNP Paribhas

It depends on a host of factors that include your risk-taking ability, the asset classes you chose, investment horizon and expected returns. While the portfolio that you construct and the holding period of your investments is largely tethered to your financial goals, when it comes to investing in equities, it is always wiser to invest for the long-term i.e. for a period of at least 5 years. Holding equity investments for the longer term can offer investors myriad benefits. Below, we discuss two primary ones.

Mitigate portfolio risk

Market volatility plagues every kind of investor and nearly every kind of investment strategy. In the short-term, equity markets can be fairly volatile as stocks respond to market noise and are influenced by skittish investor behaviour. The sharp movements in stock prices can increase portfolio volatility and the overall portfolio risk. This is the reason why most investors shy away from equities. However, it is important to understand that while stock prices might respond to short-term noise, over the long-term, the true fundamental value of a stock is expected to emerge. Once a stock’s true fundamental value is realised, it is expected to generate stable returns. Additionally, by holding an equity investment for the longterm, you are able to average out the daily ups and downs that stock prices are prone to witness. In the long-term, price volatility is likely to get normalized, thus mitigating volatility risk. A long-term investment strategy for equities can reduce portfolio volatility and concurrently enhance risk-adjusted returns.

Power of compounding