For the last 15 years, we have taken a long term approach to invest money in all facets of our lives including the stock market. We grew up watching our fathers do this and learnt by osmosis.

This strategy is also called ‘Buy and hold’.

Here are the reasons why long term investing approach is always the safest and best way to invest in the market.

Reason 1: Compounding

This is where you can see the 8th wonder of the world take effect.

E = mc2 pales in comparison to compounding.

einstein GIF

“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.

Albert Einstein

 

Interest to us isn’t the modern concept of interest. Rather it’s the ‘interest’ in the company in the form of our capital invested in it.

Long term investing allows your capital to accumulate and gain profits over time.

Compounding Exponential vs Linear

Reason 2: What history tells us

As a rule of thumb if you hold your money over ten years in an index fund or blue-chip stock, historically there is almost ZERO chance of you losing money. Despite share market crashes, financial crises and world events.

All time ASX 200 index (XJO)

All time ASX 200 index (XJO)

 

Most prominent share market crises

Most prominent share market crises

Crashes and corrections are healthy in our view and offer discounted buying opportunities.

Let us take for example a popular Vanguard ETF (ASX: VAS). Note: VAS does not pass our halal and ethical screening framework.

ETFs are defined as exchange-traded funds, they are traded on major stock exchanges. An ETF is a collection of tens, hundreds, or sometimes thousands of stocks and bonds in a single fund. It’s targeted for people who want less risk and don’t want to spend time researching stocks to select.

Let us also take a company we have researched, Medical Developments International Limited (MVP).

Story time. It’s 2010. We have two investors, Amina and Zara.

Amina is fresh out of high school and chose to put the $1000 in the ETF, after learning that an index is less risk and she doesn’t need to do any further research.

Zara is a single Mom and did her research through various sources and put her $1000 in ASX: MVP (Medical Developments International).

Fast forward. Current day 2020. Actual prices for ASX:VAS and ASX:MVP used in the table below.

Index fund compared to a growth stock

Index fund compared to a growth stock

Table of profits over 10 years

Zara made a profit of 3,200 %. That’s 33 times her initial investment!

Reason 3: Fees and taxes

If you’re a long term trader you will only ever pay one fee (brokerage or transaction cost) for the life of your purchase.

You also pay fewer taxes in Australia as a long term investor when you hold shares over a year.

However, if you’re a trader, you have to pay your broker fees every time you buy and sell shares.

Fees can be over $10,000 over a year!

These fees and charges that you pay is money that could otherwise have been accumulating a return of 5-12% every year.

For a full example of trader fees view our complete article on the tabarruk website.

This is not financial advice. View our disclaimer.