What are the key advantages of long-term investing compared to short-term investing?
Consistency is the key advantage of having a long-term perspective when it comes to investing. To me, short-term investing is speculative market timing. Very few individuals successfully try to time markets (stock values and interest rates). Why expend resources on timing markets? Just take a long-term view. Compare the current total values of your equity investments and fixed-income investments. If the percentages differ from your target allocations (which you should have previously formulated), then make adjustments by selling the asset class in which you are over-invested and using the proceeds to buy the asset class in which you are under-invested.
As an example of the folly of a short-term perspective, consider that if you missed the ten best days of stock market performance in the past 30–40 years, the value of your stock portfolio would be 50% less than if you were consistently long stocks. Just google “equity returns if you miss the ten best days of the stock market” to learn more. Because the stock market is so unpredictable in the short run, there is a good chance that a short-term investing philosophy would have missed some of those ten best days.
How does inflation affect long-term investments, and should investors be worried about it?
Inflation is notoriously difficult to predict. Remember the start of 2021? The U.S. had just finished twelve years of very low inflation, averaging 1.5% per year, and “experts” were more concerned about deflation than higher inflation. Very few individuals were forecasting the high inflation we experienced in the subsequent three years. Similarly, when inflation commenced, few individuals thought it would last three years; most thought the high inflation of 2021 was a transitory phenomenon caused by supply chain disruptions and labor shortages.
What will inflation be over the next several years? No one knows.
So, yes, you should be worried about inflation, but don’t try to time it by predicting the future to make your investment decisions.
What should long-term investors do about inflation? Have a percentage of your portfolio in TIPS and/or I-bonds. Have a percentage of your portfolio in short-maturity fixed-income securities. Finally, have equity exposure; if corporations can pass their higher costs on to their customers, then stocks will be shielded from the adverse impact of inflation. Just consider how stocks successfully performed in 2021–2024, with high inflation prevailing.
What are some good strategies to achieve long-term investment success?
The best strategies to achieve long-term investment success include:
- Start saving and investing when you are young. Suppose you can earn 7% per year on the $10,000 you save. If you save for 35 years, you will have $1.3 million accumulated. If you begin earlier and save for 40 years, you will have $2 million accumulated! Start young!
- Invest at least ten percent of your annual wages. Hopefully, your employer will match at least part of the amount you save.
- Buy-and-hold well-diversified mutual funds and ETFs that have very low expense ratios.
- Maintain a target asset allocation mix that is consistent with your age, your level of risk aversion and your unique special circumstances. In general, younger investors should be heavily invested in stocks. As you age and approach your 60th birthday, gradually switch some of your financial wealth into fixed-income securities.
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