February 2023

Why investing with a long-term mindset is essential


There’s no doubt that 2022 was a difficult year for financial markets around the world. Uncertainty was seemingly the running theme for the year – the UK saw several different prime ministers, war broke out in Ukraine, and geopolitical tensions heightened as China cast its eye over Taiwan.

Historically, unpredictability is no friend of the stock market. And, it can be tempting to feel the need to sell off your faltering investments during times of market downturn in an attempt to mitigate any potential losses.

This is typically a riskier approach to investing, and if you feel as though you need to invest in this way, then you’re not alone. A report from FTAdviser shows that three-quarters of UK investors feel forced to take on more risk than they would like. 

Granted, this is somewhat understandable: inflation is still high, and a recession may be looming on the horizon. Yet regardless of how nervous you feel, it’s vital that you take a long-term approach to your investing.

Read on to discover why you shouldn’t let short-term market downturns worry you, and why it’s essential to have a long-term mindset when you invest. 

Historically, the longer you’ve invested for, the higher your chances of positive returns

It’s a common human reaction to feel worried for your investments during periods of uncertainty and market volatility. Many people may attempt to “buy low, sell high” when markets are volatile, though it’s often difficult to know when the “buy low” periods end and the “sell high” period begins.  

In fact, research shows that this perspective may be flawed, as historically, the longer you hold your investments for, the higher your chances of positive returns are. 

Indeed, Nutmeg reports that if you picked a randomly-chosen global stock on any day between January 1971 and July 2022, and then held that investment for 24 hours, you’d have a 52.4% chance of making positive gains.

But crucially, if you instead invested your money in the same stock and held it for a financial quarter during this 50-year period, your chances of positive returns would rise to 65.5%. The odds of positive returns rose even further to 72.8% if you kept this investment for a year, and again to 94.2% over 10 years.

As you can see, the historical data shows that a long-term investing strategy substantially increases your chances of positive returns.

Similarly, the same source shows that the longer you leave your money invested, the lower your overall probability of loss.

In fact, if you left your money invested for three years, your historical probability of loss would be roughly 20%. Hold this investment for 10 years and your chance of loss drops to around 5%.

If you kept your investment for 15 years, Nutmeg reports that your probability of loss would drop to almost zero.

While there is no “risk-free” investment that has guaranteed returns, data shows that by holding your investments for 10- or 15-year periods, you can limit short-term risk to your portfolio. 

It’s easy to feel stressed about the performance of your investments, especially during the first few years. When you can view your investment portfolio anytime from your phone, it’s tempting to constantly check and worry about its performance.

But, as you can see, historical data shows that you can increase your chances of positive returns, and subsequently decrease your chances of loss, when you invest over the long term. Also, by leaving your investments be, you could even lift some of the stress involved. 

Some of the market’s worst days are often followed by its best

You will quite often hear the phrase: “time in the market, not timing the market”, when it comes to investing. While it’s easy to feel as though you should sell off your investments when markets are in decline, it may be helpful to keep this expression in mind.

In fact, research has shown that some of the market’s worst days are often followed by its best. Statistics reported by CNBC show that the US stock market’s best day between 2002 and 2022 was 13 October 2008 – right in the middle of the 2008 financial crisis – with returns of 11.6%. 

Perhaps even more surprisingly, the third-best day was 24 March 2020, which was soon after countries around the world entered lockdowns to halt the spread of the Covid-19 pandemic. 

As you can see, the market’s best days often come right after their worst. So, logically, it would have been more sensible for investors to stay invested when the markets fell on these dates, rather than panic-selling.

For instance, say you’d reacted to the sudden downturn caused by Covid and decided to sell off your investments in fear of losing value. In this example, there’s a good chance that you’d have lost money when markets eventually rebounded.

This displays the power of market sentiment; investors want to believe that markets will eventually recover, and historically they generally do. So, sometimes resisting knee-jerk reactions and keeping steady is the best course of action.

After all, the market rewards inactivity, and if you sell your investments when things seem precarious, there’s a chance you could lose money. 

In fact, The Good Investors reported that after Fidelity, the investment company, reviewed its customers’ portfolios, it found that the best-performing ones actually belonged to those who had already died.

This goes to show that inactivity in the market can be rewarded with returns in the long term.

Get in touch

With a financial adviser, you can develop a long-term investing strategy that will give you the peace of mind that your investments will deliver the returns you need to live your desired lifestyle. 

Please email info@holbornfinancial.com or call 020 8946 8186 to get in touch with us today.

Please note

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.