When you set up your investment with Franc, one of the things we ask you is how long you intend to invest for. This is very important as it will help us understand what type of investment product to recommend for you. All things being equal, the longer your investment time horizon, the more risk you can take on. Plainly put, this means that you should put more of your investment in shares if you intend to invest for a long period of time.
As an aside, I was speaking to a friend the other day who said they had invested in a retirement fund that had low exposure to shares because she was afraid of the impact that Covid would have on the market. This person probably has more than 30 years left before they retire so this money still has ages to remain invested for. With this type of time horizon, you need to invest in a product that has high exposure to shares so that you give yourself the best chance of maximising your investment’s potential. You can afford to go big!
Anyway, here are some reasons why you should invest in shares for the long term.
You ride out the bumps
Shares are “risky”, ie. they can go up or down in value over a short period of time but generally they do go up over the long term. Over the past 10 years, if you remained invested in the Satrix 40 ETF for a period of 1 year, you had a 82% chance of a positive return (including dividends). Over 3 and 5 years you had a 99% chance of a positive return. If the time period you invested for was 7 years you made money 100% of the time.
The below table shows the minimum and maximum annualised returns for the time periods above. As you can see, time makes a difference and the longer the period the less of a difference between the highest and lowest, which means the volatility of returns are reduced. So just like diversification helps in this regard, time does too.
As we explained here, compounding can make a huge difference to your investment returns. Remember with shares you most likely get paid dividends and if you reinvest these you get a boost as effectively both your income and capital growth are compounding (At Franc we automatically reinvest any dividends you earn).
To illustrate the impact of compounding - let’s compare 2 investors who both invested R1000 a month for 10 years and let’s say the annual rate of return (including dividend reinvestment) was 13%. Tshepo and Lebo are now both 40 but Tshepo started investing when he was 20 and stopped contributing when he was 30 and then let his money continue growing. Lebo started investing when she was 30. Both have invested R120,000 each. Lebo has made a decent return - her investment is now worth over R230,000. However, Tshepo now has almost R800,000!
You can just live your life
When you have a long term investment mindset you don’t need to pay constant attention to what is going on in the markets - crashes, booms etc are just short term noise. You can sleep easy knowing that in the long term this should not matter that much to you.
However we all know this is easier said than done. Investing is not that difficult - you need to choose high quality, low cost products and then stick with them. The last part is where psychology comes in - many people panic when the markets take a hit. The unease you feel when your investment goes down is understandable but if you sell out you are locking in your loss. Rather stay the course and wait for the markets to rebound. Timing when to enter and exit the market is almost impossible. Sometimes not following the news may be a good thing!
Cutting down on fees and taxes
With many investment products there are fees that are paid when you buy and sell. The more you buy and sell, the more fees you pay. This reduces the value of your investment. Even if a product says there are no fees, there are always hidden costs of buying and selling. For example when you are selling shares there is what is called a bid/offer spread. This is the difference between what someone is willing to pay and what the counterparty is willing to sell at. If this spread is large it could mean you may not get a good price when you buy or sell, so effectively that is a “cost” to consider.
The tax rate that is paid on any gain on long term investments is also a lot lower than what you may pay on short term trading (less than 3 years). This can be complicated and there are some grey areas but again it is worth taking into account.
Be in it for the long haul
At Franc we want our customers to be long term investors so that they can start building their wealth. SA is the most unequal country in the world and we need that to end. Start investing now and get your money to work for you - but remember it’s a marathon not a sprint!