Benefits Of Compounding
It is said that investing for the long-term i.e. 5 or more years has some advantages that investors who try to time the market or day-trade over the short-term can’t take advantage of. Warren Buffett’s quote, “If you aren’t planning to hold a stock for 10 years, don’t even hold it for 10 minutes”, suggests how important and beneficial long-term investing really is. But what will one really gain by putting their money into stocks for such long periods of time?
A Comfortable Retirement / Future
If you start investing in stocks at least about two or three decades before retirement, you won’t have to worry about paying the bills post retirement. Long-term investing is like creating yourself a financial cushion for a secure future. The highlight here is that if one stays invested for say 5 - 7 years, low market periods will no longer be a cause of worry as the long holding period offers ample opportunities for a good bounce back and recovery. What’s more, one can also generate good returns from all of the golden market moments during the holding period. The stress caused due to the violent increase and decrease in share prices will therefore be relatively low. This will mean a healthier present and as a result a healthier future for you.
• A Fuller Bank Account
Investing in stocks for a long period of time can generate handsome profits but the cherry on the cake is that income from long-term capital gains ie stock market investments for over a year, are taxed lower than regular income ie short-term investments in stocks. This means savings of 5% as per the capital gains tax prescribed in the Union Budget 2018. Aside from this, frequent investing and withdrawing from the stock market means increased expenditure by way of taxes, brokerage etc per transaction on the exchange. This money that appears small in the short-run can really add up overtime and make a difference to your cash balances, and long-term investing can do this for you.
Benefits Of Compounding
The profits earned from long-term investing can be re-invested to make more money. This can create good wealth for any investor over the long run. For example: re-investing your profits at just 5% can double your investment in just 15 years. The 5% tax savings made on the capital gains tax can also be re-invested in the same stocks or elsewhere to generate greater profits. The earlier one starts investing, the greater will be the gains from compounding.
These are a lot of benefits! And if one has enough patience and conviction, they can reap all of them and amass a great amount of wealth along the path of long-term investing. This way the stock market is not so risky after all, is it?