How to invest to increase your chances of success
9/28/2022
There is a saying that if you invest in stocks just like real estate, the performance will be much better. Like real estate, which is invested with the intention of burying it for at least several years once invested, stocks are more advantageous the longer they are invested. Now that investment products are emerging as the most realistic alternative in the era of low interest rates, long-term investment is emerging as a basic strategy for stock investment. This is because the fact that the longer the investment, the lower the investment risk and the higher the return. Long-term investment as an investment strategy to increase the probability of success these days with a lot of interest in stock investment.
It is true that the Korean stock market is difficult to convince investors of long-term investment based on past performance alone. There is a deep hole of distrust as it repeatedly fluctuates in the 500-point range of the Composite Stock Index to the 1000-point range, and falls out when it goes up and falls without any reason if it seems like it will take a step up. For this reason, there are many investors who think that long-term investment is rather a loss in the Korean stock market, and that it is better to invest in timing while riding the market flow.
However, if you look at the performance of individual stock investment in the meantime, the saying that investing at the right time is irrelevant. Not to mention the excess return, it is not uncommon for it to fall short of the average return of the market. Buying when it's cheap and selling it when it's expensive is the right answer that everyone knows, but only those who have experienced it can empathize with how difficult it is to keep it exactly. If so, was the long-term investment that people bury in the Korean market was not as good as people expected? Not long ago, Samsung Securities selected 11 high-quality stocks by industry, such as Samsung Electronics and SK Telecom, and invested in them. Performance by investment period has been analyzed. According to the data analyzing the performance of investing in portfolios with these stocks from 1990 to February 2005, the return on short-term investment with an investment period of one year reached an average of 28% on average. And the longer the investment period, the higher the performance. When the investment period is 3 years, the annual rate of return is 32%, and when the investment period is 5 years and 10 years, respectively, the rate of return is 34% and 65%.
Although the stock index always seems to be standing still, it is empirically demonstrating that the longer the investment is made, the higher the performance. Moreover, if you look at the return probability of the portfolio, the probability of a positive (+) return is only 66% when you invest for one year, but 84% when you invest for three years and 100% when you invest for five and ten years. It shows that long-term investment yields high returns, but also increases the likelihood of success when investing.
Similar results are also observed in the case of indirect investment through stock-related financial products rather than individual stocks. Looking at the data comparing the rate of return of stock investment products and the rate of rise of the stock index over the same period in the Korean fund evaluation, it makes us think again about why long-term investment should be made. According to the data surveyed in April, the rate of increase of the Composite Stock Index was 9.6% for those who invested in the past one year, whereas the return on investment of equity-type funds that accounted for more than 60% of the stocks included in the survey was 10.9%. Then, when the investment period was extended and invested for two years, the rate of increase of the stock index during that period was 72%, whereas the return of stock-type funds was 76%. Even more so, the rate of increase of the stock index was 5.6%, while the rate of return of equity-type funds reached 47%. In the case of indirect investment, it can be seen that the longer the investment, the higher the performance.
As shown in the above results, long-term investments that are buried for a long time have a significant effect on stock-related investments. However, it should be noted that these results do not apply to all investments in any stock. In fact, a study of the share price growth rate of about 500 listed companies over the past 10 years showed that less than a third of the companies whose stock prices rose compared to 10 years ago, and the other two-thirds had their stock prices decreased. When the stock market rises, the price of all stocks does not rise at the same time, only the stocks that rise, and more stocks that do not rise, may rather fall. Therefore, long-term investment is approached, but holding any stock for a long period of time is not a good thing, but long-term investment based on the possibility that it will rise can achieve the desired result. The best way to do this is to form a portfolio of large blue-chip stocks and make diversified investments or indirectly invest through stock-type funds. However, the more realistic and easy way among these is the indirect investment method through a fund. It is not easy for individuals with limited investment funds to build a portfolio of large blue-chip stocks that are not cheap. In addition, in the case of direct investment in stocks, it is difficult to make the investment according to the originally planned because psychological factors play a large role. Even now, if you invest in stock-related investment products with a prospect of 3 years or more, you will probably get better results than expected later.
