For many people, the opportunity to make a quick buck is highly alluring. While it has been done in the past and will undoubtedly be done in future, the odds of getting rich quick are very much stacked against the individual investor. That’s at least partly because the business world moves slowly and also because share prices are exceptionally difficult to predict in the short run.
In terms of the former, it takes time for a company to make the necessary changes to its business model and products and deliver improved financial performance. This may take the shape of expansion into a new territory, an investment in marketing or an acquisition that adds new products to the company’s inventory. While optimism may be high following any of these changes, the reality is that it can take a number of years for them to have a material impact on the company’s bottom line. As such, buying shares in a company and expecting a quick turnaround is not only unusual, but rather unrealistic.
Play the long game
Accurately and consistently predicting share price movements over a short period of time is incredibly difficult. While long-term investors are able to assess the financial strength of a business, its valuation and various other fundamental aspects of it, short-term traders usually follow a trend. Although trends can of course continue, the reality is that following the market and the investment herd can cause an individual to buy high and sell low. In other words, they may buy a stock because it has risen, when in reality the best time to buy in terms of capital gain potential may be just after it has fallen.
Although it’s possible to get it right on short-term trades, vast sums of personal wealth don’t tend to be made or kept for the long run through adopting such a strategy. However, for long-term investors, the power of compounding can lead to life-changing returns from a portfolio that started off as a relatively modest amount. For example, a consistent return of 7% per year can lead to a debt-free lifestyle or early retirement for many people. And although such a situation may not be as exciting as short-term trading, there’s no equivalent Warren Buffett in the world of short-term trading. In other words, there’s no individual who has made of tens of billions of dollars this way.
As well as the potential for higher gains, investing for the long term can be a lot less stressful and less time-consuming than buying and selling on a frequent basis. That’s because it’s less time-intensive and because investments are given a multi-year time horizon, there’s no panic if they underperform in the meantime. Furthermore, buying and selling less frequently can mean lower dealing costs as well as a more stable financial outlook.
So, while the promise of a quick gain is appealing to all of us, the reality is that investing for the long term may be more profitable, less stressful and more accessible for individuals who have a full-time job and other commitments.