Think long term when investing.
One of the main concerns for any type of investing is market volatility. Volatility measures the degree to which prices change over time. Another way to think of volatility is in terms of price swings. The greater and more frequently an investment's price swings, the higher is its volatility. Investments with high volatility have a high degree of risk because their prices are unstable.
It is important to note that short-term volatility is not necessarily indicative of a long-term trend. Security can be highly volatile on a daily basis but show long-term patterns of growth or stability. Some investments may maintain purchasing power over time but can fluctuate wildly in the short term.
The advantage of long-term investing is found in the relationship between volatility and time. Investments held for longer periods tend to exhibit lower volatility than those held for shorter periods. The longer you invest, the more likely you will be able to weather low market periods. Assets with higher short-term volatility risk (such as equity) tend to have higher returns over the long term than less volatile assets such as fixed income securities.
If you need funds for the short term, investing in equity is not encouraged as the markets tend to be volatile. It's better to go for more secure options like debts but debts are way more complicated than equities and require proper expertise and knowledge. That is why, in India, gold and real estate are preferred investment options. However, if you’re looking to harvest your returns five or more years into the future, an investment in equities or an equity fund can be ideal.
Although there are ups and downs, if you align your portfolio for the long term, you’re more likely to make money, especially if you focus on high-quality businesses. After a crisis, many investors terminate their SIPs. This is a very bad choice because the whole point of a SIP is to keep investing, irrespective of market conditions. Investments made when the markets down tend to make the greatest profits. As Warren Buffett says, “Be greedy when others are fearful.”
The not so secret recipe of the wealth creation in long term is the “power of compounding”. The concept of compounding is simple. Power of compounding is nothing but interest earned on interest or profits earned on profits. The power of compounding over a long horizon, if invested in the right asset, is enormous.
The chart below shows the growth of Rs 1 Lakh investment over various time-scales, assuming 12% annualized returns. You can see in the chart that the growth is not linear, it is exponential.
Just like we work to earn money, money works to earn money. Unfortunately, while we work hard to earn money, most of us do not make our money work hard. Money is put to work for us when it is invested. It cannot work for us if it lies in the low yielding savings bank account
Very often, it happens that investors say that they do not have sufficient savings because of expenses, home loan EMIs, vehicle loans so on so forth. These investors are missing the point. Rs 5 Lakhs invested for 5 years at an annualized return of 12% will yield a profit of Rs 3.8 Lakhs. The same money spread over 20 years at a monthly installment of just Rs 2,080 will yield a profit of Rs 15 Lakhs. You do not need a sufficiently large investible corpus to create wealth, investing from your regular monthly savings, even if it is a small amount can help you create substantial wealth. This is the essence of systematic investments. The power of systematic investment is unlocked through compounding and the key to its success is discipline. Mutual fund Systematic Investment Plans or SIPs is a proven way to create long term wealth from your regular monthly savings.
Investment for the long term can build you a fortune if you stick by them that long ~ Warren Buffet.
It is important to note that short-term volatility is not necessarily indicative of a long-term trend. Security can be highly volatile on a daily basis but show long-term patterns of growth or stability. Some investments may maintain purchasing power over time but can fluctuate wildly in the short term.
The advantage of long-term investing is found in the relationship between volatility and time. Investments held for longer periods tend to exhibit lower volatility than those held for shorter periods. The longer you invest, the more likely you will be able to weather low market periods. Assets with higher short-term volatility risk (such as equity) tend to have higher returns over the long term than less volatile assets such as fixed income securities.
If you need funds for the short term, investing in equity is not encouraged as the markets tend to be volatile. It's better to go for more secure options like debts but debts are way more complicated than equities and require proper expertise and knowledge. That is why, in India, gold and real estate are preferred investment options. However, if you’re looking to harvest your returns five or more years into the future, an investment in equities or an equity fund can be ideal.
Although there are ups and downs, if you align your portfolio for the long term, you’re more likely to make money, especially if you focus on high-quality businesses. After a crisis, many investors terminate their SIPs. This is a very bad choice because the whole point of a SIP is to keep investing, irrespective of market conditions. Investments made when the markets down tend to make the greatest profits. As Warren Buffett says, “Be greedy when others are fearful.”
The not so secret recipe of the wealth creation in long term is the “power of compounding”. The concept of compounding is simple. Power of compounding is nothing but interest earned on interest or profits earned on profits. The power of compounding over a long horizon, if invested in the right asset, is enormous.
The chart below shows the growth of Rs 1 Lakh investment over various time-scales, assuming 12% annualized returns. You can see in the chart that the growth is not linear, it is exponential.
Just like we work to earn money, money works to earn money. Unfortunately, while we work hard to earn money, most of us do not make our money work hard. Money is put to work for us when it is invested. It cannot work for us if it lies in the low yielding savings bank account
Very often, it happens that investors say that they do not have sufficient savings because of expenses, home loan EMIs, vehicle loans so on so forth. These investors are missing the point. Rs 5 Lakhs invested for 5 years at an annualized return of 12% will yield a profit of Rs 3.8 Lakhs. The same money spread over 20 years at a monthly installment of just Rs 2,080 will yield a profit of Rs 15 Lakhs. You do not need a sufficiently large investible corpus to create wealth, investing from your regular monthly savings, even if it is a small amount can help you create substantial wealth. This is the essence of systematic investments. The power of systematic investment is unlocked through compounding and the key to its success is discipline. Mutual fund Systematic Investment Plans or SIPs is a proven way to create long term wealth from your regular monthly savings.
Investment for the long term can build you a fortune if you stick by them that long ~ Warren Buffet.
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