Equities: 5 benefits of Investing in Equities for the long term

Five Benefits Of Holding On To Equities For The Long Haul

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Investing in Equities and gold have a Tom and Jerry’s relationship. Generally, we see that gold gains when stocks fall. So, the correlation is that they are inversely proportional to each other.

Most investors believe in gold as a haven investment. But you must be clear about what we are referring to by ‘safety.’ What we mean by this is ‘safety’ for ‘what’?

A safety net from the stock market, perhaps.

Historically, when the markets are pessimistic, gold performs well. There are several instances when we see investors letting go of their stocks when the markets are falling and allocating funds to gold instead.

Investors tend to hold gold longer, considering it a savior. But the reaction is the opposite when it comes to equities.

Stocks are more volatile in the short term than in the long term. Therefore, the long-term strategy should come into play regarding equities.

Let’s look at 5 Benefits of Investing in Equities for the Long Term

1. You Are Likely to Gain More:

If you stay invested in your equities in the long term, you are more likely to make money.

Risk will always be present whether you put money in stocks or any other market-linked products, for that matter. However, analysts peg risk at 50%. Stock prices can fall to 0, but their rise can be infinite too.

For example, if you had invested in Titan shares in 1995 at Rs 8 a piece, the same stock is now trading at Rs 2500 apiece. Imagine had you held on to this multi-bagger stock for 20 years? If you select the right stocks and stick with them you can watch your portfolio can grow in value.

2. Compounding Works to Your Advantage:

When it comes to equities, time is your greatest friend. So the probability of your stocks generating more value and delivering higher returns is much higher.

Remember, you can also take advantage of the power compounding. The income received from dividends can be reinvested over time to generate greater returns and potential profits. In due course, it can become your wealth creator.

For instance, pocketing a 3% yield will double your investment every 33 years. It is considering that there is no dividend or stock price growth. If you reinvest this income into the same stock, the chances are high that your investment will grow by 100% in a decade.

3. Your Investment Risk Drops:

Investing in equities for the long term ensures no risk of losing out on lucrative opportunities. But unfortunately, timing the market is an art that very few have managed to master accurately.

So, staying invested in your chosen equities makes more sense than buying and selling constantly. It means you won’t miss on days when the market is high if you stay invested.

JP Morgan Asset Management studied this market timing phenomenon by compiling the data of the S&P 500’s most significant moves between December 1993 and December 2013. The findings showed if investors stayed invested for 20 years, they would have received a 483% return on the broad-based index. However, going in and out of the market would have led to them missing out on the ten most significant moves and reduced their return to 191%.

4. Removes the Short-Term Volatility Out of The Scene:

Stock prices are unstable in the short term, primarily due to price fluctuations. However, they can grow to deliver decent value if you remain invested for several years.

The sharp rise and fall of the markets can be confusing for investors. They allow their emotions to take over. Rash decisions directed toward curbing short-term loss can ultimately lead to financial loss in the long term.

For example, the Titan stock was launched at Rs. 8 apiece in 1995. The price declined to Rs. 3 per share in 1998. If investors opted to sell off their holdings to minimize losses, the eventual financial loss is far greater when the same stock consistently rose from 2010 onwards.

5. Helps in Portfolio Diversification:

It is never helps putting all your eggs in one basket. The philosophy stands true for your investing habits too.

Investing in equities and gold helps to diversify your portfolio. The strategy is to minimize risk and, therefore, loss. Market fluctuations are a given, and you cannot escape them entirely.

So, when you purchase equities, you will encounter short-term volatility that gains from the gold in your portfolio can offset. The idea is not to sell everything but to reduce financial loss as much as possible, as the same equities may deliver greater returns in the long term.

Takeaways

It would be best to opt for multiple asset classes to help you reach your financial goals. For example, gold gives your portfolio the hedge, whereas equities bring in the much-needed high returns that create wealth in the long term.

The choice is not one versus the other but investing in stocks and gold together.

You must remember that when you select your stocks, look at the company’s core fundamentals. Do not make your decision based on market fluctuations in the stock price alone, as price movements normalize when the performance of the business improves.

Check out our Latest Article on How Long term investing helps create life-changing wealth – TOI 

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