Do Long Term Investments Provide Better Returns?

This follows on from our last insight into the issues of frequent trading. The simple answer is ‘Yes’ and history overwhelmingly supports the idea that holding diversified funds and shares for the long term tends to provide better returns than frequent trading. 

We only need to look up the history of the stock markets to prove this- using the well-known S&P 500 as an example. The S&P 500 has averaged about 9–10% annual returns over the last century (before inflation). It is important to note that that return assumes buying and holding, not trying to jump in and out of the market. 
 

Broad-based index funds (like S&P 500) are designed to capture the market’s long-term growth and studies by Vanguard, Fidelity, and Morningstar consistently find that investors who stay invested in low-cost funds tend to outperform those who make frequent changes. Even professional fund managers struggle to beat the market after fees over long periods.

1. Compounding: Gains reinvested over decades create exponential growth. 
2. Recovery after downturns: Markets have always recovered from crashes given enough time (eg, 2008, 2020). 
3. Lower costs & taxes: Fewer trades mean less drag on performance (something we covered in the previous ‘insight’) 

An investor who put $10,000 into the S&P 500 in 1980 and did nothing would have over $1.1 million by 2020. An investor who jumped in and out during downturns almost always ended up with far less. 

History shows that the patient, long-term investor who holds diversified funds (mutual funds, ETFs) usually does better than the frequent trader — not just in returns, but also with lower costs, less stress, and a higher chance of meeting long-term goals. 

When Investing in a Sure Bet Goes Wrong