Have you ever thought about retiring comparatively young and not spending your best years chained to the desk and rushing for deadlines?
Or, do you want to build a nest egg that will offer you the luxury of not worrying about money later in life?
If the answer to any of these questions is yes, then long-term investing is one of the best ways to achieve this holy grail.
Unlike get-rich-quick schemes, long-term investing is significantly more likely to make your money work for you and allow you to accumulate wealth. This approach has numerous benefits, but you need to be patient and prepared for the long haul.
Here are some tips to help you maximize profits and improve your odds of success.
Understanding Long-Term Investing
Long-term investing isn’t a single strategy.
There are different ways to create your portfolio, and according to experts, the best method is diversifying your assets. So, putting all your eggs in one basket isn’t a good tactic because tying up your money in the same or highly-correlated investments leaves you without plan B.
Some of the most popular long-term investing strategies are:
Growth Investing
Growth investing is buying growth stocks, that is, shares of new or small companies that are experiencing fast-paced growth and whose revenue is expected to explode.
Earnings of a certain startup might be nothing to write home about at this point, but if it’s building momentum and showing significant potential to boost sales and profit in time, then you should think about adding it to your investment portfolio.
Value Investing
This strategy focuses on buying stocks, real estate, and other assets that are trading for less than their true value.
The trick lies in finding stocks with a greater difference between their intrinsic value and current price. That’s how you’ll buffer the financial impact if you make a mistake about the company.
Dividend Investing
Investing in dividend stocks is a good idea because:
- Their volatility – and subsequently, your risk – is lower.
- They provide two types of income – capital appreciation and dividend payments.
Even though the volatility of this market has historically been lower than that of the S&P index, dividend investing can still pose a risk if you aren’t sure how to find the right stocks.
Get Familiar with Investing Risks
Investing can be a risky business, depending on the assets you opt for.
For example, stocks are typically riskier than bonds. That’s why reducing the number of stocks is recommended when you’re about to reach your investment goal.
Another factor to be aware of is that stocks of developing countries are riskier than U.S. stocks. These emerging markets tend to be increasingly volatile due to political instability, lack of liquidity, and poor corporate governance.
Bonds are considered to be safer than stocks, but there are risks associated with these types of assets too. In the case of corporate bonds, things will go downhill if a company files for bankruptcy. Bondholders are the ones to take the hit in this scenario. To minimize the risk, invest only in companies with a high credit rating.
Avoid Market Timing
Market timing refers to the practice of moving your funds in and out of the stock market either by selling or buying more ahead of a predicted downturn. It boils down to identifying when it’s time to invest and when to pull the plug based on the projections of price movements in the future.
One of the biggest downsides of this strategy is being out of the market during a sudden and unexpected surge.
Since the market is usually full of uncertainty, market timing can send even seasoned investors on the slippery slope toward a substantial profit loss. Even Merrill advises against this strategy and suggests time in the market as a safer alternative.
Focus on the Bigger Picture
Don’t get upset over the short-term movements of your investment.
Financial markets frequently experience ups and downs, but this mainly affects short-term investors. In your case, market dips are just bumps on the road. And if you concentrate on the big picture and stick to your initial plan, you won’t make a hasty decision.
Long-term investing means being in the market for more than a year. This means that even if a market goes down, your loss can be just temporary. And when the market rebounds, your stocks might be worth more than you expected in the first place. That’s why stock market fluctuations shouldn’t bother you too much.
Don’t Act on Every Hot Tip You Get
Accepting every hot and confidential stock market tip you get can be a big mistake. No matter how reliable your source is, you still have to do your own analysis and decide whether to invest.
While it’s true that some tips can turn out to be valid, relying on others’ advice won’t get you far. It’s best to carefully research companies you want to invest in and learn as much as possible about the market.
Use More Than One Metric
Many people insist on the price-earning ratio and neglect other metrics.
The truth is that P/E ratios work best when paired with other analytical procedures. Hence, a low P/E ratio doesn’t always imply that a stock is undervalued. You need other data-driven insights to figure out its intrinsic value.
Monitor Your Performance
Make sure to revisit your portfolio at least quarterly to get a fresh perspective on things.
This will allow you to rethink and, if necessary, change your asset allocation.
If you’re in a hot market, your stocks can quickly outgrow their planned ratio of your allocation. So, make sure to reduce their number. Rebalancing your portfolio will help you stay aligned with your strategy and keep bigger risks at bay.
Wrapping Up
Long-term investing is all about sticking to your financial goals and not succumbing to the stress and volatility of the stock market. Most of the time, it’s best to resist the urge to sell or buy after listening to the latest news. And whatever you do, don’t time the market.
