The Motley Fool

Investing For the Long-Term Can Reap Rewards: Here’s Why

We often hear famous investors such as Warren Buffett talk about investing for the long-term and holding on to shares of great companies through thick and thin. But why exactly should we invest for the long-term, and what rewards can it bring to us? Is there some secret formula for getting rich which only the wealthy seem to know about, but is elusive to the common person?

First, let us explore the concept of the stock market. It is a financial platform where companies raise money for business expansion, in what is known as an “Initial Public Offering” (IPO). Companies raise funds through IPOs and deploy them into promising ventures and growth areas, which help the companies to grow their revenues, profits and cash flows. As the shares of the company in question are now listed on a stock exchange, an investor can purchase these shares in order to participate in its growth.

However, do note that business growth needs time to plan and execute, and in the short-term, there may be investments needed which may negatively impact the profitability of the company. Growth initiatives take time to bear fruit and the benefits to the organization may only manifest itself years later. Remember too that if the business improves and becomes more profitable over time, the share price will also follow. The investor would enjoy both capital appreciation and perhaps also a decent dividend yield to boot.

Short-term fluctuations in the share price should not be an inducement to sell, as it would lead to regret if the company continues to be successful in growing its revenues and cash flows. Should an investor sell each time the share price declines (many times for reasons unknown), he risks sabotaging his own long-term investment goals.

The evidence is clear – to reap maximum benefits from investing, the investor should stay the course and be emotionally unaffected by periodic share price fluctuations. Instead, focus on the underlying business and grow with the company over time. Investing is a get-rich-slow method and can work if the investor has the tenacity to hold onto shares of great companies over years, if not decades.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.