Since our childhood, we have been taught to be forward thinking and we have always been asked to plan long term.
Don’t you think that our parents started planning before we came into this world?
While we were enjoying our kindergarten days, our parents planned long term.
Starting from, which school we step into to our higher education.
From our marriage plans to their own retirement plans.
Basis the long term investment plans, they made our future secure.
They enjoyed the happiness of their family, in return for their look-ahead approach and long-term investment goals.
In this article, we will understand as to how long-term investments serve us future security and much more.
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What is long term investment?
Long term investments means holding assets such as stocks, shares or securities etc for more than a year.
Usually, the long-term investments means holding the investment for a minimum period of say, 3 years, 5 years, or 10 years and so on.
These kinds of investments are suitable for those investors who have substantial liquid funds for meeting short term needs and bear the risk appetite to lock-in their funds for that span of time.
Benefits of long term investment:
Time period
Basis the time period, the short-term investment may not reap you higher profits. On the other hand, long-term investment has a substantial period of time to grow. It provides room to the investors to understand the trend in the market for different long-term investments.
Power of compounding
The magic of compounding really works well in case of long-term investment. The most important strategy is to invest early and see how the money multiplies.
For instance – Mr. Sharma deposits an amount of Rs. 1, 00,000/- in a savings bank account, at an annual interest rate of 7%, compounded monthly. He wants to know what returns will he get at the end of 20 years.
The future value of investment will be 100000 (1 + 0.07/12) ^ 12 (20) = Rs. 403874 approximately.
Diversified portfolio
We should never keep all your money in one pocket.
Similarly, we should never narrow down our investment horizon.
Long-term investment provides us a wide range of portfolios which helps us to invest in multiple choices, rather than sticking to a particular stereotype investment.
A well-diversified portfolio comprises of both the Debt & Equity.
In case of asset allocation, the most common thumb rule that helps asset allocation is the “100 minus age” rule.
This means that if your age says 55,100-55 then 45% of the portfolio should comprise of equity and the balance can be in debt comprising of bonds, debts, and other similar asset types
With the diversified range of investment products, you can chalk out the performing ones and do away with the nonperforming products.
Disposal time
In case of long-term investment, the investments have a sufficient disposable time to study the stocks and then to take the decision of going long or short on them.
For instance, Mr. A bought a share in anticipation of rising prices.
However, the price shows a downward trend.
Had the shares been taken as a short term investment, Mr. A would have sold off the same and booked losses.
On the other hand, in case of long-term investment, Mr. A can wait for a sufficient time and the shares may show an upward trend over the period of time.
Risk
The element of risk is a major component that keeps the investors skeptical on which kind of investments to plunge in.
Depending on the kind of investments, investors find lower risk in long-term investments as compared to short-term investments.
The major reason is that in case of short-term investments, the probability of risk is high due to the rigorous fluctuations in a small span of time.
On the other hand, long-term investments give a substantial time to understand the risk underlying the particular investment class.
Bottomline:
Whether it is a long-term or short-term investment, every kind has its own pros and cons.
Some may find liquidity in short-term investments.
Others may look for future safety through long-term investments.
Whichever kind of investment we may choose; we must always keep track of our financial stability.
Of course, long-term investment is a major source to have a safe future but not at the stake of your present needs.
So plan wisely and invests strategically.
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