Does investing in the stock market make you lose your sleep at night? Is the fear of losing capital stop you from investing?
Are you someone who lost your capital in day trading or options trading recently?
If your answer is yes, this guide will help you get your peace back and generate steady returns.
Many investment strategies are out there, but long term investing strategy is one of the best strategies.
Pitfalls of trading
Zerodha is a leading low-cost brokerage firm in India. A year back, Nithin Kamath CEO of Zerodha tweeted about the percentage of trader success rate.
It’s a beginner’s mistake to assume your trading capability is in the 1% of active traders. Its a normal to have overconfidence in yourself.
Even if you fall into the 1% category, your returns barely beat the inflation. Bank fixed deposit returns are generally lower than the inflation rate.
Studying the charts, complex patterns, and being on your toes constantly is not worth the effort to generate these kinds of returns.
Hence it is wise to stay from day trading , futures, and options.
Best long term investing strategy for the majority
If you are working in a day job or your personal life doesn’t let you commit time to study the individual stock, then you can opt for index investing.
Index investing is a no-brainer approach to generate wealth over long term.
When you invest in an index you are buying a basket of stocks. This saves your time & effort from analyzing the individual stocks.
Also the expense ratio of index funds is too low and it becomes significantly tough for active fund managers to beat the index return in long run.
The Most decorated investor Warren Buffett supported buy and holding the index fund on several occasions.
Why long term investing strategy work?
Avoid panic selling
Investing in stock market is a high-risk asset. The Market reacts to various times like the pandemic, nuclear crisis, and scandals.
Most investors dump their stock in panic as if the world is going to end tomorrow. This is one of the main reasons most investors lose money.
What if you hold your position? Usually, the stock market has given bumper returns after a downfall.
In 2009, S&P 500 gave a 26.5 % return after the housing market crash at 2008
Benefit from compound interest
Albert Einstein said “Compound interest is the eighth wonder of the world”
If your grandpa invested $100 in the US stock index in 1900. Guess What?
You can’t help yourself from getting more than $9.5 million in your portfolio as of today. That’s the magic of compound interest.
You can take advantage of the compound interest by using long term investing strategy
Less brokerage/tax paid
When you adopt a long term approach to investing, you simply hold on to your investments.
The best part is you pay fewer brokerage fees, taxes, Transaction charges, etc. in your investing career.
People who do overtrading pay way more hidden charges than long term investors.
Since these charges are negligible, investors tend to not pay much attention to them. The sad part these charges compound in the long run.
Avoids frequents check
There is no greater way to spoil your peace than checking your portfolio on a daily basis.
If your portfolio returns are up, you are happy. If not, it causes disappointment.
Stock market is volatile asset, it moves up and down. If you give your investments a long time, the greater the returns.
Few investors have the habit of peeking at their portfolios on daily basis. It’s not helpful to you as an investor when the price goes low, because it can lead you to make erratic decisions.
Not convinced?
Fidelity investments did a customer audit to find who is their best-performing investors from the period between 2003 to 2013, surprisingly the best-performing investors are either dead or inactive (People who forgot about their investments).
But being a disciple of long term investing strategy, you are well prepared in advance to give time for your investment. This mindset can keep you from peeping at your portfolio frequently.
Perceive market crash as a buying opportunity
The number one thing which dreads the most investors is the market crash. Most of the investors don’t want to see their portfolio in red.
Market crashes can be compared to the discount sales of a supermarket chain. Just go and grab it!
Due to bad news and negative publicity, investors pull themselves from seizing the opportunity.
If S&P 500 can withstand both the world wars, is there anything worse that can happen?
In a long term investing strategy, you forget the short-term volatility and see it as a discount sale from the market.
No influence of media or tips
One of the worst things you can do buying on the tips of an expert who appear on the news channel.
They boast about how a handful of stock tips had performed well but ignore the thousand failure tips.
You can keep a track of their buy and sell signal call for a year and see how it had performed.
You will get your answer in that exercise.
Stops you from chasing hot stocks
Chasing hot stocks for the sake of others are chasing is a justifiable failure.
Why have stocks become hot? The stock was given so much hype by the media or promoted excessively to lure investors.
Without understanding its underlying business model, retail investors like you & me go and buy it. Because “so-so” says “so”
“So so” getting paid for promoting the stock. But you and I will lose our money.
What motivates this behaviors? Seeing stock as a quick rich scheme, need to generate exponential returns.
All these behaviors are a quick path to burn your hands.
Stable returns
By picking a high-quality business it is possible to generate a return of 10 to 12 per annum.
This 10 percent looks small, but in the long run, it can grow to become a sizable amount.
Most of the high-quality business would be the products we use in our lives, well-established brands, and pricing power. In this case, the stocks fall into your circle of competence and you will be confident in your decision.
As this business grows steadily, the price of stock grows gradually. Some of the business in this category falls into the immortality business like P&G which was established 187 years ago.
Stable returns make your capital grow.
Less churning rate
Another advantage of long term investing strategy is less churning rate in your portfolio.
Why? Most businesses are selected based on your convictions and circle of competence.
Unless a very bad thing happens to the business , there won’t any necessity to sell any of its shares.
Hence less churning rate leads to less tax or brokerage fee too.
No brainer approach
As I mentioned at the beginning of this post, If you have a constraint on time.
Then the no-brainer approach to becoming rich is through an index fund.
Check here: Why Warren supports index fund?
Please read the above article on why Warren buffett supports Index fund.
Conclusion
Most of the renowned investors of the world achieved success by following long term investing strategies.
I hope this strategy makes a difference in your financial life too.
Thank you for reading!
