Why long-term investing beats short-term speculation

The prospect of investing in the stock market can be exciting. But it’s important to remember investing isn’t a game, or a get-rich-quick scheme.

The reality of being a good investor is less exciting than you might think. It’s all about researching and investing in great businesses that you plan to hold onto for the next five to ten years – sometimes longer. Investing takes this kind of long-term approach.

Only buy something that you’d be perfectly happy to hold if the market shut down for ten years.

Warren Buffett

Investing is a marathon, not a sprint

We invest to achieve the same common goal – to increase our wealth so we can do more with our money or improve our financial resilience.

However, we don’t always invest in the same way or share the same views. It’s what makes the stock market go up and down in the near term.

Investors can be broadly split into two camps – short-term speculators and long-term investors.

Speculators try to predict the markets’ next steps. They regularly chop and change their investments based on the latest news or market trends, with the aim to profit from small changes to share prices. Speculators’ time horizons can range from a few days, up to a few months.

The opposite end of the spectrum are investors. We think it’s sensible for most people to sit firmly in this camp. They pay less attention to short-term market hustle and bustle, and aren’t too worried about what happens to share prices today or tomorrow. Instead, long-term investors try to look two steps ahead – backing companies they think have the potential to perform well over the next five to ten years.

In the short run, the market is a voting machine, but in the long-run it is a weighing machine

Benjamin Graham

What Graham meant by this quote is that stock markets in the short-term ebb and flow based on people’s emotion and market sentiment. But over the long-term, the truly great companies show their value.

Neither approach to investing is necessarily the wrong one. But one approach is very risky and it’s impossible to accurately predict the outcome. The other has more chance of long-term success.

We know stock markets have tended to go up over the long term – history tells us that. It’s why investing is a marathon and slow and steady wins the race. Be the tortoise, not the hare.

The chart shows the 10-year rolling returns for the FTSE 100 index over the last 32 years.

FTSE 100 index - 10-year total return

Scroll across to see the full chart.

Past performance isn’t a guide to future returns. Source: Refinitiv, 31/12/1990-31/12/2022.

Past performance isn’t a guide to future returns. Source: Lipper IM, 31/12/2022.

Before any charges or taxes, the investors that played the long game (10 years in this case) were rewarded with profits in all the periods between 1990 and 2022. With an average return of 95% with dividends reinvested. Even during the height of the financial crisis in 2008/09, those who invested ten years before that were still showing a profit.

Although it’s difficult to measure the success of short-term investors (as their time horizons vary), is there really a case to be anything but a long-term investor?

Of course, investing in the stock market doesn’t come with any guarantees and past performance isn’t a guide to future returns. But we can learn some lessons from the past. The valuable lesson here being: investing long term gives you the better chance of success.

This article isn’t personal advice. If you’re not sure what’s right for your circumstances, ask for financial advice. All investments fall as well as rise in value, so you could get back less than you invest.

Invest little and often

Now that we’ve covered how long you should invest for, you might be asking how often should I invest?

We think investing little and often is a great tactic for many investors. Not only does it offer an affordable way to build the size of your investment pot, committing to invest something on a regular basis builds good habits.

Investing on a regular basis can reduce the risk of volatile markets too – where share prices can move up and down in value sharply.

By drip feeding your money in the market at regular intervals, you benefit from pound cost averaging. The theory is you buy fewer shares when prices are high and buy more shares when prices are low. Over time, this should average out the price you pay for your investments.

It’s worth noting, stock markets don’t always harmonize with theories so pound cost averaging can work against you if prices rise and never look back. Investors could be better served by investing a lump sum in this scenario.

However, we know markets tend to move up and down in the near term. The law of averages suggests investing monthly should even things out over time.

With HL, it’s possible to start investing by Direct Debit into FTSE 350 shares, funds and certain investment trusts and ETFs from as little as £25 a month. You can also benefit from lower dealing fees. It costs £1.50 per trade with Direct Debit, compared to £5.95 - £11.95 for one-off share trades online. Dealing in funds is free.

MORE ON INVESTING BY DIRECT DEBIT

Ready to invest?

Whether you’re new to investing or have years of stock market experience, hand-picking individual company shares with long-term potential isn’t a walk in the park. It takes countless hours of research to find the stand-out companies of the future.

We think funds are a great option for simple and effective long-term investing. Funds pool together money from lots of investors. They invest in a collection of investments which are chosen and run by a professional fund manager, so you’ll benefit from their knowledge, expertise, and research into lots of different companies.

Funds come in all shapes and sizes. Some funds invest purely into company shares, which are better suited for investors willing to accept more risk. Others hold a mix of investment types like shares, bonds, commodities, and cash for a more conservative way to invest.

To help you get started, our investment research team have put together some fund ideas. But they’re not a personal recommendation to buy.

Investing in funds isn’t right for everyone. You should only invest in funds if you have the time and know-how to diversify your portfolio to help reduce risk.

Before investing it’s important to check the fund’s objectives align with your own, understand the fund’s specific risks and if there’s a gap in your portfolio for that type of investment.