Rather than reacting to short-term price swings, this approach aims to build assets by relying on a company's underlying growth and the effect of compounding over time. Tax-advantaged installment-investment programs are also designed with long-term investing in mind.
The underlying idea
The longer the holding period, the smaller the relative impact of any single, temporary price swing tends to be. Reinvesting dividends or distributions can also make it easier to benefit from compounding.
Benefits and points to keep in mind
This approach reduces the burden of frequent trading decisions and can help keep transaction costs down, but it also means committing funds for a longer period, which reduces liquidity. Holding for the long term also does not guarantee a profit — depending on the underlying business or market conditions, it is possible to carry an unrealized loss for an extended period. Compared with other investment styles such as short-term trading, neither approach is inherently superior — each has its own characteristics and points to keep in mind.