When starting to invest, much focus is placed on finding the best financial product or the optimal strategy. While these concerns are pertinent, it’s easy to overlook the key aspect and most essential quality for anyone wanting to build their wealth: patience.
Long-term investing refers to buying and holding positions for extended periods, sometimes spanning years or even decades. Therefore, patience is key. There are two major advantages in planning your investment strategy over such a horizon: benefiting from compound interest and capitalizing on the long-term upward trend of the market.
The main reason for investing in the long term is to benefit from compound interest. Your investment will thus generate returns not only on the invested sum but also on the returns generated each year.
To illustrate this idea, imagine you invest CHF 100,000 in the market with an average annual return rate of 8%. In 10 years, your investment would be worth approximately CHF 215,892. However, if you are even more patient and decide to keep your fortune invested for 30 years, it would amount to approximately CHF 1,006,265.
The radical difference between the two sums clearly illustrates the potential gains offered by compound interest.
The second reason is to take advantage of the markets' long-term upward trend. If we analyse the average return of a stock index such as the S&P 500, it generated an average yield of 10% per year over the last century, excluding inflation. As this is an average, it means that the return was higher in some years, and lower – or even negative – in others.
Financial markets regularly go through periods of volatility. These events are not always easy to anticipate, and it is certainly important to stay calm and not react impulsively. It's not uncommon for an investor to withdraw from the market during phases of significant decline, consequently missing out on the gains from a market recovery. On the contrary, these periods of great instability often present opportunities. Market volatility is difficult to navigate, and attempting to do so proactively often leads to unsatisfactory results. It's also possible that you may buy your securities at too high a price and suffer the consequences of a fall in value.
The key takeaway is that if your investment horizon is sufficiently long, the value of your portfolio is likely to appreciate. To benefit from this, it's about choosing an investment strategy that takes into account your target returns and your risk tolerance then maintaining your asset allocation choices even during temporary market turbulence, holding your positions for a sufficiently long period. In short, it's all about being patient.
Of course, not everyone has the same time horizon. If you're 30 years old, you probably have at least as many years ahead before your retirement. However, the situation and therefore your strategy will be very different when you're 55 years old.
The Piguet Galland team will be delighted to discuss your goals in life and determine together the best way to help you achieve them.
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