Protection against future inflation
Although inflation is falling in the current state of the economy, there is no guarantee that this trend will continue in the future. Inflation is cyclical and is influenced by many factors such as economic growth, monetary policy and global events. It may happen that within a few years inflation will increase again, which could devalue your savings. Investing long-term in assets that have the potential to grow faster than inflation helps protect the purchasing power of your money. For example, investing in stocks, real estate or commodities can provide returns that outpace inflation, ensuring that the value of your savings doesn't fall.
Investment and monetary policy
Investment in capital markets is very closely linked to a country's monetary policy, which implies that a fall in inflation may lead to a reassessment of the monetary outlook by the central bank. This is also currently the case in the US, where the consumer price index, along with other key macroeconomic indicators, has shown a positive environment for interest rate cuts. This was confirmed at the September announcement, with the level of interest rates falling from 5.50% to 5.00%.
If you are asking about the relationship of your investments to monetary policy, the answer is as follows. During times of heightened inflation and economic uncertainty, it is usually advantageous to buy more conservative securities that offer a reasonable and, above all, stable return relative to the risk taken. Conversely, a period of low inflation combined with falling interest rates provides an opportunity to buy riskier securities such as equities. Statistically, it has been shown that since 1973, the S&P 500 index has gained an average of 4.9% in the first year after interest rates were cut[1]. *
Use of the compound interest effect
Compound interest is one of the most powerful tools in investing. Imagine that the profits from your investments are regularly reinvested to generate further profits. This process repeats itself, with each new profit based on a larger base. The longer you invest, the more pronounced the compounding effect. For example, an investment of €10,000 with an annual return of 5% will be worth approximately €26,533 after 20 years. Without compound interest, it would only be €20,000. It follows, therefore, that the long-term time horizon is a key factor in building wealth through investment.
Achieving long-term financial goals
Everyone has financial goals, whether it's to buy their own home, fund their children's education, provide for their retirement, or fulfill life dreams such as travel. Long-term investing allows you to systematically build the capital needed to achieve these goals. Investing smaller amounts on a regular basis can lead to a substantial fund over time. Additionally, with a clear investment plan, you can better track your progress and adjust strategies as needed.
Diversification and risk reduction
Investing always carries a certain amount of risk, but long-term investing allows you to manage these risks effectively. By diversifying your portfolio, you spread your investments across different asset classes and sectors, reducing the impact of negative developments in one area on the overall portfolio. For example, if the stock market is going through a downturn, your investments in bonds or real estate can still deliver steady returns. A long-term horizon also allows you to outperform short-term market volatility, as historically markets tend to rise over longer time horizons.
Seizing market opportunities
Financial markets are characterised by up and down cycles. Long-term investors can take advantage of these cycles to buy quality assets at bargain prices during market downturns. Instead of trying to time the market, which is often inefficient, long-term investing allows you to focus on the value of your investments and their future potential. By taking this approach, you can benefit from the overall growth of the economy and markets without undue stress from short-term fluctuations.
Psychological benefits of long-term investing
Long-term investing promotes financial discipline and helps avoid impulsive decisions. Short-term market fluctuations can trigger emotions such as fear or greed, which can lead to adverse investment decisions. With a long-term strategy, you have a clear plan that allows you to focus on your goals regardless of current market conditions. This approach reduces the stress associated with investing and promotes better and more consistent investing habits.
Conclusion
Although the current inflation in Slovakia is declining, long-term investment of free funds remains strategically advantageous. It helps protect the value of money against future inflation, takes advantage of the compounding effect and supports the achievement of long-term financial goals. A diversified investment portfolio can deliver higher returns than traditional savings products, providing financial stability in uncertain times ahead.
Adam Austera, Analyst at Ozios
* Past performance is no guarantee of future results.
[1] The price performance of the S&P 500 index over the past five years: https://tradingeconomics.com/spx:ind
