Long-Term Investing: Investing isn’t just for Wall Street gurus and finance wizards. It’s also something you can, and should, do with your hard-earned money to improve your financial future. If you put in the time and effort now, you can enjoy the benefits of your investment returns years from now.
In order to get the most out of your investments, it’s important to follow these 10 secrets to successful long-term investing.
1) Set up an Investment Policy Statement
An Investment Policy Statement is one of your most important tools as an investor. It forces you to articulate your goals, objectives, and risk tolerance and to make sure they’re consistent with your portfolio’s allocation. Remember that time frame doesn’t equal investment time frame—you may be investing for decades but still have a five-year time horizon if you want to retire in less than five years, for example.
An ideal Investment Policy Statement should be succinct and easy enough for anyone on your team to understand; if it isn’t, you might need more than 10 secrets to develop it. If you are currently working with an advisor or financial planner, ask them what their process looks like; often, financial professionals don’t go through something as formalized as writing down their IPS at the first meeting because there’s no way for them to know where your goals are going overtime.
Sometimes people change their minds about what they’re looking for from an advisor, so planning ahead will save you from having to go back and forth multiple times overtime trying to figure out if you’re on track or not. This can allow both of you greater flexibility over time even though initially it might feel like adding unnecessary structure.
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2) Invest With a Time Horizon
Time is your friend when it comes to investing. This is because your time horizon (how long you plan on staying invested) determines how much time and patience you have for short-term market movements. A short time horizon can lead investors to get overly excited about a good month or quarter and sell at exactly the wrong time, or become discouraged about a bad month or quarter and not sell at exactly the wrong time.
For example, looking back over the past several decades, from June 1999 through July 2012, U.S. stocks returned -1% per year (with dividends reinvested), but investors that sold during that period would have lost an average of -3% per year!
3) Diversify by Asset Class
When investing for a long period of time, it’s essential that you spread your money around. The best way to do that is by diversifying your investments across different asset classes. That means investing in stocks, bonds, and cash (such as money market accounts and CD’s). When you spread your wealth around different investments, each one will grow at its own pace without affecting other areas of your portfolio.
This allows you to weather downswings in one area and jump on opportunities in another without having cash tied up. To learn more about how diversification can benefit your investment portfolio over time, read our full post: Diversify Your Portfolio Over Time for Stronger Returns.
4) Rebalance Regularly
Sometimes over time, you’ll notice that your portfolio has gotten off-kilter, meaning some of your assets are appreciating at a much faster rate than others. If you let things go too long and one part of your portfolio gets completely out of whack, it can be hard to get back on track.
So, one of your best long-term investing tips is to set up regular rebalancing guidelines for yourself. This way you can make sure that investments aren’t diverging so far from their target weightings that they become an issue later on down the road.
5) Keep Costs Low
Keeping your costs low is a great way to increase your investment returns. It sounds simple, but it’s surprising how many investors aren’t aware of its importance. Remember, a dollar saved is just as good as a dollar earned. Consider investing in passively managed index funds that have low expense ratios and keep their fees as low as possible over time—which could make an investment of $500 turn into $2 million or more over time!
There are lots of ways to keep your costs down—ask your broker about them and do some research online before you start investing, but one of our favorite methods is dollar-cost averaging.
6) Use Professional Help When Needed
When you’re first starting out, there’s no shame in using a professional. If you’re not sure how much money you should put in your 401(k), or whether life insurance is right for you, it may be worth it to consult a financial advisor.
The same goes if you want someone else to do all of your investing work for you. In fact, that’s probably a better idea than putting all of your eggs in one basket and hiring an amateur or doing it yourself.
7) Ignore Short-Term Noise
The media is filled with reports about market gains and losses. Though it can be tempting to try to time markets or trade frequently, experts agree that staying invested for long periods of time (an average of at least 10 years) results in higher returns.
Don’t let short-term noise make you lose focus on your long-term goals. Instead, ignore short-term market activity and look at a market’s longer-term trends when determining where your investments should go.
8) Know Your Risk Tolerance
There are different levels of risk tolerance, so it’s important that you know yours before you begin investing. Different investment vehicles have different levels of risk associated with them, so if you have a low-risk tolerance and invest in high-risk vehicles, your portfolio may perform poorly.
If your investments do poorly and fall below their initial value, how long can you hold out? Are you okay holding them for 3 months? 6 months? or 1 year?
9) Stay The Course Through Market Volatility
Don’t panic when market swings occur—instead, continue looking at factors that are relevant to your long-term investment strategy. By focusing on your plan and sticking with it, you can weather any storms in equity markets.
10) Create Written Financial Plans
The most effective long-term investors in history all have one thing in common: They created written financial plans. Without a doubt, you can learn from their methods. A written financial plan is, essentially, a list of your overall financial goals and objectives. It’s also a detailed analysis of your current situation, including an outline of your income and expenses.
The most important part of any investment strategy is sticking with it. Whether you’re planning on keeping a few hundred dollars in an IRA or investing millions of dollars in real estate, don’t give up on your long-term goals.
Consistency is key when it comes to investment success, so create a plan that works for you and stick with it through good times and bad.