Thinking for the long term is always difficult. After all, we live in the right now! It’s immediate, it’s in your face, and it demands a lot of us. Planning decades in advance seems like a waste of time when the present is so pressing.
However, one day the future will become the present, and we will wish that our past selves had thought ahead. By now, we all understand that we need to invest for the future. But, how do we choose our investments with a future focus?
Current yield refers to the income an investment provides in a year through interest or dividends. However, it is not nearly as important as total return which is how much we have earned over the entire period we have held an investment.
The big mistake comes when we choose investments based on what they can provide us right now instead of focusing on the long term. In the long term, holding an investment that maybe doesn’t pay out much year to year but whose value grows over the decades, is often a better choice.
Historically, equities (the investments we choose for long term growth) have a return more than twice that of bonds (investments that have regular pay outs) over the long term1.
Just like doing laundry today means clean socks for the week, picking investments with a focus on the long term means our future selves are taken care of.
1 As per Jeremy Siegel’s Stocks for the Long Run
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