Some people invest in shares with a short-term view, looking to take advantage of small movements in share prices to pick up quick wins.
While this approach- also known as share-trading - might pay off if you’ve got the luck, expertise, and time to do it, the risks of short-term investing are high and can often outweigh the rewards.
So, if you’re looking to use the sharemarket to grow your wealth over time, you’ve come to the right place.
Key benefits of long-term investing
There are many reasons to believe a long-term approach is effective.
As one of the world’s most famous investors Warren Buffett has advocates: “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years”.
One of the main benefits of long-term investing is that it has proven to deliver returns.
According to analysis from Credit Suisse, Australian shares have given their investors an average annual return of 6.7% per year since 1900.1 That makes us the second best performing sharemarket in the world over 120 years.
Lower fees and costs
Lower transaction costs are a key advantage of long-term investing—and that translates into higher returns.
Transaction costs—the price you pay to invest your money in a company’s shares—are often overlooked.
There are transaction fees involved with investing in shares, including brokerage. But these are only triggered when you buy or sell. If you hold shares for years, you’re going to incur much lower expenses than a short-term trader.
Another factor to consider is Capital Gains Tax. You pay tax on any returns you make from your original investment, charged at your marginal tax rate (could be up to 47% including Medicare levy). If you hold your shares for at least 12 months however, you may be eligible for tax concessions.
Riding out the rough times
As we’ve seen recently with the COVID-19 pandemic, it’s extremely difficult to predict what’s going to happen in the next month or year.
Disruptions to sharemarkets happen all the time, from the 1987 Stock Market Crash, the bursting of the Tech Bubble in 2000, to the Global Financial Crisis in 2007. Each trigger is different and the time it takes to recover varies too.
So, investing in shares with a long-term approach puts time on your side. Generally speaking, shares outperform many other investments over the long-term meaning your chance of a negative return gets lower the longer you invest.
The other advantage of time, is that if an unforeseen event does occur, you’re able to hold your investments until markets recover. So, always consider what your objectives are and your investment timeframe.
Emotional side of investing
While it’s good to know the facts, it’s also important to acknowledge the emotional side of investing too. Sometimes we react irrationally when events cause anxiety. This means we may set out to invest for the long-term, but instead react to short-term market volatility like selling out in a crisis.
That’s one good reason to work with a financial adviser. They can help instil some discipline into your long-term investing strategy. And that means the strategy has more chance of delivering the returns you need.
Bottom line: If you can afford to put your money away for a lengthy period, you’re more likely to reduce your risk and maximise your chances of returns. Patience pays.
1 Livewire: Australian market wins gold- 5 March 2019
Important information and disclaimer
This article has been prepared by NULIS Nominees (Australia) Limited ABN 80 008 515 633 AFSL 236465 (NULIS) as trustee of the MLC Super Fund ABN 70 732 426 024. The information in this article is current as at July 2020 and may be subject to change. This information may constitute general advice. The information in this article is factual in nature and does not take into account personal objectives, financial situation or needs. You should consider obtaining independent advice before making any financial decisions based on this information. You should not rely on this article to determine your personal tax obligations. Please consult a registered tax agent for this purpose. An investment with NULIS is not a deposit with, or liability of, and is not guaranteed by NAB or other members of the NAB Group. Opinions constitute our judgement at the time of issue. In some cases information has been provided to us by third parties and while that information is believed to be accurate and reliable, its accuracy is not guaranteed in any way. Subject to terms implied by law and which cannot be excluded, neither NULIS nor any member of the NAB Group accept responsibility for any loss or liability incurred by you in respect of any error, omission or misrepresentation in the information in this communication. Past performance is not a reliable indicator of future performance. The value of an investment may rise or fall with the changes in the market.