As the world moves forward and everything is more accessible, faster, smarter, and easier, people tend to think more short-term than in the long-term. That is why investing can be mentally challenging, but this article will show you that investing long-term may be the best thing you can do with your money.
Investing is mainly a way how to put an interest on your money. It is not supposed to make you rich. If you are already rich, you can live off investing. However, by living paycheck to paycheck, you can only save a certain amount of money you are able to invest. That is where long-term thinking comes in to protect you from inflation and gives you the possibility to create your own retirement savings.
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Each of us has a particular personality and different risk aversion. For example, someone is comfortable only when investing in real estate or REITs (Real Estate Investment Trusts). The other person is okay with investing in cryptocurrencies even though it is considered one of the riskiest asset classes in the financial world. If you want to put an interest on your money, consider the level of risk you are willing to accept first.
Prices of houses or flats only tend to fall during crises, so the risk is minimal. However, cryptocurrencies can rise and fall by 20 % only in a matter of one day. But, of course, this type of risk is not for everybody, which is why there are many ways to invest, and people adjust the risk level accordingly.
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Asset class and return expectations
Then, when you choose your risk tolerance (low, middle, or high), look at what type of asset class you want to invest in and calculate what kind of a return you can expect. Using historical data is a very useful tool to stay objective and realistic. For example, if you look at the long-term average yearly return of the S&P 500, which is 9.8 %, and invest every month, quarter, or year, the probability of positive returns if you invest for 5, 10, or more years is very high.
Investing 100 € monthly, 250 € quarterly, or even 500 € yearly for 10, 20, and 30 years may bring fantastic results. For example, 100 € invested every month into S&P 500 for 30 years could result in more than 200,000 €. 250 € invested every quarter could end up as 168,229 € in 30 years. That is pretty retirement savings for such a small, but consistent investment.
Investors who invest regularly may expect a massive accumulated sum with an averaged yearly return of 9.8 % before any fees or taxes. It is a result of regular investing in one asset class and sticking to it. Just buying the S&P 500 keeps your portfolio diversified as you own 500 different stocks.
You just need a steady income, discipline, and mainly patience because nobody wants to get rich slowly. That is also why Warren Buffett is so wealthy. It took him decades to get where he is right now. The higher the interest and the longer the time period, the more significant the multiply effect of your investment. It is easy as it sounds.
Even Warren Buffett says if he invested just 114 $ in S&P 500 in 1942 with reinvested dividends, that investment would now be worth over 400,000 $! That is the true power of compound interest and long-term investing combined. But, of course, nobody wants to wait 80 years for their investment to make significant returns.
The same applies to commodities or cryptocurrencies. Whatever you invest in, do not forget about risk tolerance. Moreover, it is beneficial to study the markets, think about diversification, and think long-term. Besides these crucial aspects of successful investing, avoid emotions and FOMO (fear of missing out) when markets are overhyped.