The Importance of Long Term Investments With AI Technology

This article was written by Isaac Rothstein – Analyst at I Know First.

Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it

— Albert Einstein

Summary

  • Long term investments help maximize gains while still minimizing risk 
  • Compound interest drastically increases long term profits
  • It is important to stay disciplined during temporary downturns in the market
  • Continuously make small deposits into your account, if possible, to decrease risk
  • AI can help determine the best long term stocks to select from the S&P 500

Long Term Investments

Holding stocks for long term investments helps reduce risk and maximize gains, if done correctly. If someone invested $10,000 in any of the top 19 stocks below, they would have turned their investment into $500,000. Long term investing helps maximize gains due to compound interest and lowers risk because history shows that the market will continue to rise after short term losses.

What is Compound Interest?

Compound interest is growth upon previous growth of your investments. For example, if you have 10% growth for two years in a row you do not profit 20%, rather you make 21%. The longer your capital is invested, the more compound interest, and therefore profit, you will return.

An analogy that further describes compound interest is the snowball effect. If a small ball of snow were to roll down a mountain, it would gain size the further down it goes. Similarly, if someone starts investing a small amount and has consistent gains, the profits will grow exponentially. The earlier someone starts investing, the more compound interest they will gain. If you were to invest $10,000 right now and return a modest 10% per year for 25 years, your $10,000 would turn into $121,784, due to the eighth wonder of the world, compound interest.

Source: Nerd Wallet

Discipline is Everything

Another perk of long term investing is the ability to have discipline and hold, or even buy, stocks during a down market. Many times, people become discouraged and sell stocks during a downturn in the market. This makes it so profits are not maximized, and in some cases may even cause the investor to take a loss due to the fear of the market falling even further. Studies show that consistently adding capital to your portfolio over time, rather than investing everything at once, can generate more profit as well as give a safety net for when the market is declining.

According to Ibbotson Associates, a leading financial research firm, if you had invested $12,000 in the S&P 500 index at the beginning of the Great Depression (September 1929), 10 years later you would have had just $7,223. However, if you invested $100 every single month from then until August 1939, you would have had $15,571. Although these two hypothetical people invested the same amount of money in the same amount of time, one person lost nearly 40% while the other profited nearly 30%. Even in the worst market conditions, this disciplined investor was able to make a substantial profit.

Let’s say you were to add this strategy to your long term investments. How would this compare to the example in Chart 1? Rather than investing $10,000 to start, let’s start with $5,000 and add 10% income from the average American household which makes around $57,000 a year.

Source: Nerd Wallet

Even though the initial investment was half of Chart 1, due to disciplined additions, we now have over five times the capital as the last example.

How to Use AI to Enhance Investment Decisions

Rather than investing in the entire S&P 500 index, AI can further enhance your long term investment strategy by identifying which of the S&P 500 stocks will outperform the others. From June 28th, 2019 until June 28th, 2020, the I Know First Algorithm’s top 10 S&P 500 stocks had a 33.5% return while the S&P 500 index increased by just 4.39%.

If we use the same method of continuously adding capital to our portfolio over 25 years, but have the returns demonstrated in the image above, the growth would be tremendous.

Source: Nerd Wallet

Although we cannot expect a profit of 33.5% a year for the next 25 years, it is evident that AI can exponentially increase the value of your portfolio. By starting with just $5,000 and adding 10% of a $4,750 monthly income every month, the ability to grow your portfolio is astronomical, in addition to being relatively safe, due to the discipline brought by continuously adding small amounts monthly.

Conclusion

Long term investing is very important because the longer someone stays invested in a company, the more compound interest, and therefore profit will be made. In addition, it is essential that a long term investor stays disciplined and doesn’t get discouraged and sell their asset during a market dip; one way to help this is by continuously adding small amounts to the portfolio. This way you are able to add more while stocks are underpriced rather than panicking and selling at a low value. Implementing these two strategies for long term investing along with AI predictions can further enhance your portfolio so that you are able to make long term, consistent, gains.

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