Clearly, investing in the stock market over the longer term can provide a greater return on your
investment than putting your money on cash deposit and can provide a significant real return.
That is, the returns obtained are a good protection against the eroding effect that inflation can have on capital over the long-term.
However, with stock market investment there is always an element of volatility which can be unnerving to investors. Even investors familiar with the concept that the value of investments can fall as well as rise, are likely to feel uncomfortable in times of market volatility.
One of the most powerful ways to help reduce market risk is to invest for the long-term. In spite of their volatility, a broad portfolio of equities held over longer time periods would have consistently provided positive total returns. Taking a long-term view allows your investment longer to grow and this should make up for any short-term fluctuations.
As the chart illustrates, if you had invested USD10,000 in the stock market, as represented by the S&P500 Composite Index, on 31 December 1988 and disinvested 31 December 1989 you would have seen some growth in your investment.
However, if you had invested this same amount at the same time and kept your investment until 31 December 1993 (5 years) then your investment would have grown by 97% compared to cash which would have grown by only 35%.
This same investment encased after 13 years on 30 June 2002 would have grown by 388% compared with 108% growth in cash, thus clearly demonstrating the benefit of investing over the longer term.
- Most stock market corrections become insignificant over the longer term.
- Long-term investment allows short-term volatility to be smoothed out.
- Long-term investment allows your investment to provide a real return.