Why it’s important to think about the long term when investing


In 2020, the coronavirus outbreak and subsequent lockdowns had a significant impact on the UK economy. As a result, the stock market suffered, and this made many investors worry.

If you’ve been paying attention to economic news recently and are concerned about your wealth being affected, read on to find out why it’s important to think about the long term when investing.

The pandemic caused the UK economy to shrink by 9.9% in 2020

When the coronavirus outbreak started in 2020, it had a significant impact on many businesses. One of the main causes of business disruption was the government’s implementation of national lockdowns, targeted at reducing the rate of infection.

During these lockdowns, many businesses were unable to operate and those that could often saw a reduction in customers. Due to the fall in business, many workers were made redundant or furloughed, and so had to cut back on their own household spending.

The subsequent economic downturn meant that, according to a report in the Guardian, the economy shrunk by 9.9% in 2020.

As a result of the financial difficulties that many businesses experienced, there was a downturn in share prices. According to the BBC, the FTSE 100 index fell by 14.3% in 2020, making it the worst slump since the 2008 financial crash.

However, while 2020 proved a difficult year for investors, experts are confident that 2021 is likely to be better.

Most major world events affect markets, but usually only temporarily

The coronavirus pandemic is just one of many unexpected events that have impacted global stock markets in recent years. From the election of Boris Johnson as prime minister to simple reports on the latest inflation figures, most economic or political events have an impact on investor confidence.

However, even if they have a short-term negative effect, there’s often no need to panic. A good example of this is the UK’s referendum decision to leave the EU in 2016.

The ‘Leave’ vote was largely unexpected, and so after the results came in the FTSE 100 tumbled due to market uncertainty.

On the morning of the day after the referendum, it fell by 9%. Despite this, by the end of the month it had experienced enough growth to recover its losses, and then some.

As a general rule, all unexpected events in the global economy can have a significant but short-term impact on markets. Whilst the fear of losing money can be strong, it’s important not to panic as markets tend to recover in the long run.

The longer you invest for, the less likely you are to make a loss

One of the key points to remember when you think about your investments is that the longer you invest for, the less likely you are to lose money, despite whatever short-term disruptions there may be in the meantime.

According to market data published by financial services provider Nutmeg, if you randomly picked a trading day in the stock market in between January 1971 and June 2020 and invested just for that one day, you would have a 52% chance of making a profit.

However, if you were to invest your money for three months in the same period, your chances rise to 65%. Similarly, investing for one year raises your chances to 72% and investing for ten years raises it to 94%.

When you invest, it’s important to think over the long term, as having a fairly distant time horizon can help you to ride out periods of economic instability without fear of losing money.

Typically, investments with high reward potential also come with higher risk attached to them. This means that they can potentially suffer large losses when economic shocks occur.

Despite this, these investments can also recover quickly and return to strong growth once the problem has passed.

The importance of investing for the long term can be seen in this data from the MSCI World Index, a basket of more than 1,600 large and mid-sized companies across 23 developed countries, since 1970.

Source: Tilney

As you can see from the chart, the index shows that the highest annual return of a short-term investment (for one year) was 56%, while the lowest was a fall of 30%.

This is a different story over the long term, however. For investments of ten years or more, the highest return was 24% but the lowest was only 0.21%.

As you can see, while the highest average return may have been lower, the risk to the investor was significantly reduced.

At a time of economic uncertainty, it can be easy to see stock market falls and panic about your portfolio. It’s important to bear in mind, however, that these falls are just blips over the long term, and are not likely to make a significant impact on your financial goals if you have a well-balanced portfolio.

Get in touch

If you want to know more about how long-term investing can reduce the risk to your portfolio, get in touch. Please email info@investmentsense.co.uk or call 0115 933 8433.

Please note:

The value of your investment (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.