Why you should invest in equities only for the long term
If building wealth is your aim and you are using equity investments to achieve financial goals, then, investing for the long term will be much more profitable.
There are many kinds of buyers and sellers in the stock market. They are often classified as speculators, traders or investors based on how they view the stock investments and how long they are holding the stocks.
While speculators are those who look at the daily or hourly movements of stocks in the stock markets, traders are those who buy or sell stocks on a daily or weekly basis. Speculators and traders churn stocks very frequently. This could in a few months, weeks or days, sometimes even a few minutes. Investors, on the other hand, don’t look at the technical indicators for the stocks. They look at the fundamentals, financials and management philosophy of the company or the mutual fund house before investing in the stocks or mutual funds. They hold the investments for years or even decades to make profits over the long term. While speculators and traders have more possibility for losses, there will be very limited losses for investors if they choose the right stocks or mutual funds. Here’s why you need to be an investor in equities who invests for the long term.
No need to time the market
Trading is a different game. To be successful at trading, the trader needs to have a certain amount of money to start with. This is often much higher than that needed for an investor. Traders need to dedicate time on a daily basis if they want to make profits. Traders also need to develop a level of experience for identifying when to buy and sell stocks. Trading profits are made by buying at a lower price and selling at a higher price. This needs to be done within a relatively short period of time. This could result in profits or losses. So, the traders need to have high risk tolerance. So, it is clear that traders need to time their investments and not everyone can be a trader.
However, an investor needn’t keep reviewing the investments on a daily basis. The investor needs to do some basic research on the investment or can take the help of an investment advisor to choose the right stocks or mutual funds for the long term. Investors needn’t bother about short term downturns in stock prices. On a day-to-day basis, stock prices experience fluctuations. However, in the long run, stock prices reflect the value of the business. Therefore, a stock’s price will move upwards in the long term if the fundamentals of the company are good.
Lower possibility of losses
Since stock prices are not predictable, traders can make profits or losses depending on the movements of the markets. If they don’t monitor the prices or don’t predict them well, they could lose some part of the capital they invested. This is not the case for investors.
Equity markets tend to do well over the long term. Take the Nifty 50 index. 15 years back, the Nifty was at 1900 levels. Today, Nifty has touched 12,900. So, markets keep moving up over the long term.
Apart from the capital gains that investors get when markets move upwards, investors can even earn income such as dividends while they are holding the stocks or equity funds. So, the prospects of investors making losses on investments over the long term is low.
Why short-term equity investing doesn’t work?
Let us consider the monthly returns from Nifty 50 this year to understand this.
If you wanted to invest on a monthly basis, you would have had to time the market. While the markets have given negative returns most of the months, there are months where there are positive returns. Let’s take another year, say 2014.
There are months were the Nifty has provided negative returns, there is no pattern in returns on a monthly basis. What about yearly returns? Can you invest in the markets for a year and make profits? The data below will help.
Even if you wanted to invest for a year which is a short term, you would have had to time the markets. So, investing for the short term doesn’t work for equities.
However, long term investing does work. If you look at the five-year return for Nifty, it is a good 63%. What about ten-year returns? It is 119%.
Therefore, equity investors need to give time for their investments to do well and for returns to compound over a long period. Remaining invested for a minimum period of 5-7 years is advisable for equity. This way you can gradually build wealth over an extended period of time. You can get the benefits of perks such as dividends and stock splits along the way. You will “ride out” the downtrends in the stock market in the long run.