summary
Diversification, continuation, and compound interest are important to achieving results with long-term investments. In this article, we will explain the reasons for this, explain specific practical methods, and show investment behavior that even beginners can reproduce.
Why long-term investing is important
Conclusion: By having time on your side, you can aim for returns while minimizing risk.
In the short term, prices are volatile and uncertain, but in the long term, they are more susceptible to economic growth.
- The stock market goes up and down significantly in the short term.
- However, in the long term, it tends to rise to the right.
Short-term predictions are difficult, but over the long term, highly reproducible investment actions are possible.
Diversified investment: the basics of reducing risk
Conclusion: Separating assets reduces risk of loss.
Diversification is a method of investing across multiple asset classes or regions.
- Hold not only stocks but also bonds
- Invest not only domestically but also overseas
Benefits
- Even if one asset falls significantly, the overall loss can be suppressed.
- Enables stable long-term operation
Disadvantages
- Explosive returns are unlikely to occur when a specific asset soars
| With dispersion | No dispersion | |
|---|---|---|
| stability | expensive | low |
| return | moderate | Shake significantly |
The power of compound interest: Accelerating your wealth
Bottom line: Reinvesting profits will snowball.
Compound interest is a mechanism by which profits generate further profits. The longer the time, the greater the effect.
Approximate asset multiplier when operating at an annual interest rate of 5%:
- 10 years: Approximately 1.6 times
- 20 years: Approximately 2.6 times
- 30 years: Approximately 4.3 times
The earlier you start, the better, and the most important thing is to keep going.
Common mistakes and countermeasures
We will organize the patterns that beginners tend to fall into and how to deal with them.
| common mistakes | Measures |
|---|---|
| Repeated buying and selling in a short period of time | Decide on rules and hold them for a certain period of time |
| Invest based on popularity alone | Check the fundamentals |
| Sell when the market crashes | Decide on your investment policy based on the assumption of a decline. |
The key to continuing long-term investment is to operate based on structure rather than emotion.
Practical Framework: Core-Satellite Strategy
An asset allocation concept that is easy for intermediate investors to adopt is the core-satellite strategy.
- Core (stable axis): Stable assets such as index funds. A guideline is 70-80% of the total assets.
- Satellite (growth axis): Assets aiming for growth, such as individual stocks and theme funds. Aim for 20-30%
This enables operations that balance stability and growth.
Summary
- Long-term investment is a highly repeatable strategy
- Reduce risk with diversified investments
- The key to taking advantage of the effects of compound interest is to start early and continue.
- Operate based on mechanics rather than emotions
First step: Start by accumulating a small amount of money in a diversified investment trust (index fund).