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Warren Buffett is considered to be one of the greatest investors to ever live, and it's easy to see why. He managed to amass a jawdropping amount of money—billions, actually—all through the practice of careful, long-term value investing.
Most people who have seen his accomplishments (reasonably) want to copy that success and many try to choose his strategy. If you want to invest like Warren Buffett, then you're going to need to read up on value investing and prepare to invest in companies on a long term basis.
Though it's great that long-term investments are as profitable as they are, they aren't for everyone. If you're considering this strategy, you need to think about both the pros and cons of long-term investing before you take the leap.
Worried you're making the wrong choice? Here are the facts everyone should know before they even consider starting a long-term investment portfolio.
Pro: It's a time-tested method with proven results.
There's something to be said about investing methods that have a track record of success. Ray Dalio, Warren Buffett, and countless value investors all tend to go for the long term option because it gives the very best returns out there.
While many of the pros and cons of long-term investing might be unclear, this one isn't. It's as stark as black and white. If you choose the right companies and stick with them for a long-term period, you will win big money.
This is partly due to the magic known as compounding. Every year that your money stays in an investment, the interest compounds on top of the interest. This leads to far better returns than short-term investing.
Con: Time needs to be on your side.
Here's one of the biggest things to remember when you're weighing the cons of long-term investing: time is an issue. If you are 18 and looking to invest, then great! Long-term investing could give you a hugely profitable retirement really quickly.
On the other hand, if you're 76 and looking to do long-term investing for the first time, you're probably going to be very disappointed in the returns you make.
Time is and always will be a factor with investments, particularly long-term ones. Ideally, you will have at least 20 years to wait in order to let your investments grow. It takes a long time.
Pros: It tends to work best against recessions and bear markets.
One of the best aspects of long-term investing is how easy it is to navigate the stock market during bear markets. Seriously, this is a highly underrated perk.
If you are a short-term investor, it will be hard to figure out how to prepare for an economic downturn. Short term investments tend to be far more unpredictable during these times. After all, being able to handle economic volatility isn't always easy when you aren't sure if the investment will come back into value by your ideal term's end.
With long-term investing, your best bet is to either stay put in your investment until the market corrects or use dollar-cost averaging to help lower the overall amount of losses that you have received.
Most advice on how to deal with bear markets is based on long-term investing strategies. It's easy to see why. It works.
Cons: Say goodbye to too much risk.
Short term investing tends to be a lot more risk-friendly than long-term investing—and rightfully so! If you are a short-term investor, you're not going to be too concerned about long-term management or business strategies because you are going to be more likely to be investing based on momentum or patterns.
If you want to indulge in some of the most dangerous investments you can make, long-term investing probably won't be too good. Or, if you do indulge in them, expect them to be a much smaller portion of your portfolio than you initially expected them to be.
Pro: Most long-term investment strategies are low maintenance.
Daily life is stressful, isn't it? You have to deal with laundry, cook your own food, watch the kids, and also work a 40-hour workweek. With all those chores, do you really have time to watch your investment portfolio like a hawk?
If you want to start day trading, you better have a lot of time on your hands. Long-term investment strategies are much more time-efficient, simply because you only really need to watch over them once a month, if even that frequently.
Con: You will need to do a LOT of homework to make this work.
Long-term investing often means that you will have to think about where the company is headed in 10, 15, or 20 years. Do they have what it takes to last that long? Does their management seem capable? Does their strategy work?
Those kinds of questions are things you're really going to have to investigate and numbers alone won't be able to show the full story. So, while short-term investing could be done with a quick glance at numbers, long-term investing will mean that you will have to take extreme care in what you're buying.
Though all investing requires due diligence, long-term investing tends to be a lot more thorough in many cases. After all, it takes a while to find a company or a concept you feel you could trust for decades.
While you're thinking about all the advantages and disadvantages of long-term investing, take a moment to think about the burden of work you have to do in order to find these companies. If you don't have that knowledge about how to research or time to do it all, you might want to skip.
The only time this is not true is when you're looking at index funds as a vehicle for long-term investing. Even so, you'll still need to do due diligence on those funds regardless.
Pro: You will save on taxes.
The US tax system is very happy to see investors who invest in companies for a long-term yield. Short-term investors end up having to pay much higher rates on capital gains, which eats into profitability pretty heavily.
How heavily, you ask? Well, a typical short-term trader tends to have a tax rate of 20% to 30% on gains. Your average long-term investor will only have a tax rate of only 5% to 15%.
Con: You need to be patient.
Patience is a virtue—and it's also mandatory if you want to do long-term types of investing. If you aren't patient, then don't bother weighing all the positives and negatives of long-term investing. If you can't be patient, then stick to short-term investments. It's a far more compatible form of investing for you.
Pro: If you're patient, it can turn into a stress-free experience.
The coolest perk of long term investing is the fact that it can be a stress-free way to handle everything involving your investing life. If you choose to go the "index fund" route, then it could quickly turn into an automated "set and forget" type of investing strategy that yields returns that are similar to the market.
That's not a bad thing. In fact, apps like Stash are built on those premises.
Con: There's so many ways you can do this, it's hard to choose!
Okay, so this isn't really a pitfall, per se. However, it's worth pointing out simply because all of the pros and cons of long-term investing can change the moment you talk about a different type of investing. Grouping all long-term investments into one folder isn't something that should be done.
Long-term investing can take a plethora of different forms, and it's important to find the type of investments that would work well for your goals. Do you want to invest in real estate? Buy up fine art? Hit the stock market?
There are so many different investments to choose from, it can be hard to do so. Of course, if you're new to investing, you might as well have fun with finding the right one for you.