Imagine a cross-country car race that starts in downtown Manhattan during rush hour. One racer sees bicycle messengers speeding by in the stop-and-go traffic. Becoming impatient, he jumps out of his car, trading it for a bicycle. Once out of Manhattan, as other racers still in their cars pass him, he quickly realizes his short-term decision was unwise in light of his long-term goal of winning the race.

It may seem rather silly for this racer to trade in his car for a bike, yet investors do the same thing every day. They lose sight of the strategy that it will take to get their prize. Although many investors claim to understand the benefits of long-term investing, their actions often show a short-term focus.

So, what is long-term investing? And why is it a tenet of Trent Capital's investment philosophy?

Long-term investing is being committed to a sound investment plan-one that starts with a proper asset allocation appropriate to your risk tolerance-over a length of time, such as five to 20 years.

More importantly, though, long-term investing is a mindset that gives you perspective and discipline as you work toward your financial goals-and can keep you from making costly mistakes based on short-term perceptions. Here's how it works:

Benefit 1: Maximize your wealth  

The wealth you can accumulate over your lifetime is determined by three factors:

• The amount you save and invest.
• The return you earn on your investments.
• How long your money compounds, generating earnings from previous earnings.

The long-term mindset is key to this last point: how long your money compounds from reinvesting your investment earnings. This is something most investors have direct control over. The earlier you start and maintain the long-term outlook, the more time compounding has to work its magic.

Albert Einstein referred to compound interest as the greatest mathematical discovery of all time. And Ben Franklin stated, "Money makes money. And the money that money makes, makes money." How true!

Benefit 2: Prevent costly mistakes   Losing sight of the long term and thinking you can time the market by exiting at the peak and re-entering the market at the trough over the short term is a big mistake. Timing market shifts correctly is nearly impossible, although making modest adjustments to your strategic allocation based on current market analysis can add value. However, we continue to see investors making wholesale market timing bets.

Not investing when you have investable funds can be another form of market timing. By staying out of the market, an investor is assuming they can predict the market's near-term results. This is usually based on the recent past, which can be very misleading.

Why can market timing be so costly? Because returns are often concentrated in short periods. For example, in March 2009, US stocks were up 9%. Nearly 90% of the month's recovery came in just eight trading days following the low point of the stock market.

A study of portfolios shows what happens when you miss the top days in the market. Research, looking at returns from 1990-2009 shows that missing the market's top 10 days cut the return by nearly half on a portfolio of stocks, represented by the S&P 500® index.

Missing the top 20 days dropped the return below even Treasury bills (T-bills). And missing the top 40 days-that's 40 days out of 20 years, fewer than 1% of the trading days-produced a negative return. You can see how a small number of trading days can equate to large differences in return.

Benefit 3: Lower your risk
Having a long-term mindset and lengthening the time you hold investments can often reduce the probability of experiencing negative returns.

One study of the highest return, lowest return and average annual return of the S&P 500 over various holding periods from 1926 found that as you move from a one-year holding period to a three-year, 10-year, and finally to a 20-year holding period, the number of negative returns experienced goes down. In fact, there's never been a 20-year period with a negative return. The longer you hold an investment, the less chance of experiencing a negative return. 

How can you keep your long-term state of mind the next time you're tempted by a short-term decision?

Remember that keeping a long-term state of mind doesn't mean ignoring your portfolio. It means developing a plan based on long-term expectations, not short-term trends. Along the way there will undoubtedly be some fine-tuning. Investing for the long-term can help maximize wealth, prevent costly mistakes and lower the downside risk in your portfolio.

Or, to quote legendary investor Warren Buffet: "Someone is sitting in the shade today because someone planted a tree a long time ago."   

With the recession in its third consecutive year and the financial crisis impacting bank's willingness to lead to consumers, Americans are increasingly borrowing from their

401-(k) Plan.  According to the Investment Company Institute, which represents mutual fund companies, 18.2% of participants in defined contribution plans had loans outstanding as of December 31, 2010.  This number represents an increase of 16.5% over year-end 2009.

On the surface it may make good sense to borrow from a 401-(k) plan.  The interest rates are generally lower than those charged on credit cards and there is no requirement for a credit check.  The interest payments are credited to the borrower's 401-(k) account, producing an income stream.  However, the borrower may find that his rate of interest is significantly less than the investment returns of his options within the plan, reducing his potential retirement benefit.

There are also risks associated in borrowing from one's retirement account.  The most significant is in the event the borrower dies, becomes disabled, or is terminated from his job.  In these three situations, the participant must repay the outstanding loan balance within 60 days of the event or the entire balance is deemed to be a distribution resulting in state income taxes(if applicable), Federal Income Taxes and if the borrower is younger than 59 ½ years, there is an additional 10% Federal Excise Tax.

Each year participants default on some $6 Billion in 401-(k) Plan loans due to death or disability and the majority of those leaving their jobs also default.  This past May a bill was introduced in Congress to extend the repayment period upon one leaving his job until the April 15^th income tax deadline, extending the period from the current 60 days.  The bill would reduce the number of loans that a participant may have at any given time to three.

Some plans limit the basis of a participant obtaining a loan from his 401-(k) Plan to "Hardship" purposes of purchasing a primary residence, paying unreimbursed medical expenses, tuition for education, forestalling evection or foreclosure on one's primary residence, or funeral expenses.  Other plans do not restrict the purpose of a loan and one can borrow his eligible balance for any reason.

While on the surface borrowing from one's 401-(k) Plan might seem the most beneficial and economical way to fulfill a credit need.  However, participants should carefully consider the potential impact of a reduced investment return, the potential of his job security, and realize the tax implications of death or disability.

After a year of uncertainty, federal estate-tax law has been clarified, at least for 2011 and 2012.  Relative to prior law, the tax rate is lower, the exemption is higher and new "portability" provisions could further benefit married couples. 

In 2009, the estate-tax exemption was $3.5 million.  This exemption for 2011 and 2012 is now $5 million, as is the lifetime gift-tax exemption.  Further, the tax rate for estate assets in excess of the exemption amounts was reduced from 45 percent 35%.  So if a single person dies in 2011 with $7 million in net worth, and all of his assets go to heirs other than a spouse or charity, $2 million will be subject to estate tax after the $5 million exemption.  At the new 35 percent rates, the estate will owe approximately $700,000 to the IRS. 

The new law also restores the "basis step-up" rules that lapsed in 2010.  When you inherit an asset, your cost basis for tax purposes in that asset is generally the date-of-death value.  Therefore, when one sells such an asset, they will owe no tax on the appreciation during the decendent's lifetime. 

Finally, under the new law, any estate-tax exemption not used by the first spouse to die passes to the surviving spouse.  The survivor's estate can use that amount plus his or her own exemption.  For example, a married man dies and $1.5 million of his exemption is used to shelter bequests to his children.  His other assets pass to his wife, who will now have an $8.5 million exemption at her death, $5 million of her own plus $3.5 million from her husband.