Long-term
share investing with a diversified portfolio has proven to be one of the best ways to accumulate wealth in the stock market. By showing patience and discipline, Share market investors can take advantage of market rebounds, enjoy superior returns, and experience a level of peace of mind. As visually detailed on the chart below, this does not mean that the diversified share portfolio will grow linearly every year.
Compounding: As is often stated by financial columnists in newspapers and magazines, time is also an investor’s best friend because it more than provides long-term peace of mind, it also allows for compounding time to work its magic. Compounding is the mathematical process where interest on your money in turn earns interest and is added to your principal. This increased principal then earns interest again. This puts into focus the need to re-invest company
dividends over time.
The investor with a long- term perspective can also correct for mistakes along the way. For example, that stock you thought was going to soar like an eagle turned out to be a turkey. If you have a long-term perspective, you can change investments that aren’t working for other alternatives.
Short-term: However, if you will need the money from your share investment in the near future (rule of thumb suggest fewer than five years), an erroneous share investment can create real problems in meeting any immediate goals. Note the chart below of the Australian All ordinaries
index (XJO), where on two separate occasions (in red), the index traveled sideways and/or down for two to three year periods. Moreover, there are numerous instances where the index had negative returns.
As shown in the chart, long-term share investors, especially those who invest in a diversified portfolio, can ride out down markets, like the one in March of 2002 – 2004 without radically affecting their financial goals.
Don't Panic and Miss Out on Potential Returns: Short-term losses are disheartening, but investors can take heart in knowing that historically, long-term stock investments have been rewarded over time. History has shown that trying to time the market and panicking over short-term losses negatively affects share investments. Share investors who frequently make share purchase decisions based on short-term market movements often spend a lot of time and effort unsuccessfully predicting what the market will do next. Market timers may also reactively sell an share investment as soon as it drops in value. This could lead to panicky investors unwisely selling an investment for less than they originally paid for it. Market declines are a normal part of the equity investing cycle. History has shown that negative periods are often followed by strong market recoveries. For long-term investors, a market slump can actually translate to higher returns in the future. Market downturns can provide investors with buying opportunities that can add to their long-term growth potential, this is also called
contrarian opinion.