How To Invest For The Long Term

2. Avoid the temptation to time the market

If you know a market setback is likely to come sooner or later, you might think the solution is to pull your money out of the market just before prices fall. But spotting market downturns in advance is extremely difficult — and the stakes of not staying invested can be high. “If you jump in and out of the market, you’ll almost inevitably find yourself on the sidelines when prices push higher,” Serrano says. “And you could also miss out on dividends, share buybacks and interest payments that may continue even amid periods of volatility.”

If you jump in and out of the market, you’ll almost inevitably find yourself on the sidelines when prices push higher. And you could also miss out on dividends, share buybacks and interest payments that may continue even amid periods of volatility.

— Rodrigo Serrano, investment strategist in the Chief Investment Office,Merrill and Bank of America Private BankIn addition, big returns can happen on relatively few trading days, raising the stakes of a mistimed market exit. For example: An investor who missed the 10 best-performing days of the S&P 500 since 2010 would have seen returns of 95% versus the 190% gain they might have earned had they remained in the market during those 10 days.Footnote 1Title reads: The Best Days Make a Big Difference. Subtitle reads: Missing the S&P 500�s 10 strongest days in any decade could have a dramatic effect on cumulative returns. Text reads: Returns if you missed the 10 best days per decade in the S&P 500 since 2010 were 95%. Returns if you missed the 10 best days per decade in the S&P 500 since 1930 were 91%. Returns if you didn�t miss the 10 best days per decade in the S&P 500 since 2010 were 190%. Returns if you didn�t miss the 10 best days per decade in the S&P 500 since 2010 were 14,962%. Past performance does not guarantee future results. Source: BofA Global Research, Data as of June 8, 2020.In some cases, the longer you hold an investment, In some cases, the longer you hold an investment, the more potential there is to see positive returns. That can be truer of equities, which can be unpredictable and volatile over shorter time periods, but have done well historically over the long term.Footnote 2 “You can use time in the market — as opposed to timing the market — to your advantage,” Serrano says.

2. Spread your ‘eggs’ among multiple baskets

When you keep your savings in similar investments, you could put your money at too much risk or miss out on potential returns. Consider diversifying, or spreading your savings across several asset classes. In addition to investing across asset classes, you can diversify by investing in multiple subcategories within asset classes. Please note that there’s no guarantee that asset allocation reduces risk or increases returns.


Dont Sweat the Small Stuff

Rather than panic over an investment’s short-term movements, it’s better to track its big-picture trajectory. Have confidence in an investment’s larger story, and don’t be swayed by short-term volatility.

Don’t overemphasize the few cents difference you might save from using a limit versus market order. Sure, active traders use minute-to-minute fluctuations to lock in gains. But long-term investors succeed based on periods of time lasting years or more.

4. Understand Investing Risks

To avoid knee-jerk reactions to market dips, be sure you know the risks inherent in investing in different assets before you buy them.

Stocks are typically considered riskier investments than bonds, for instance. That’s why Francis suggests trimming your stock allocation as you approach your goal. This way you can lock in some of your gains as you reach your deadline.

But even within the category of stocks, some investments are riskier than others. For example, U.S. stocks are thought to be safer than stocks from countries with still-developing economies because of the usually greater economic and political uncertainties in those regions.

Bonds can be less risky, but they’re not 100% safe. For example, corporate bonds are only as secure as the issuer’s bottom line. If the firm goes bankrupt, it may not be able to repay its debts, and bondholders would have to take the loss. To minimize this default risk, you should stick with investing in bonds from companies with high credit ratings.

Assessing risk is not always as simple as looking at credit ratings, however. Investors must also consider their own risk tolerance, or how much risk they’re able to stomach.

“It includes being able to watch the value of one’s investments going up and down without it impacting their ability to sleep at night,” King says. Even highly rated companies and bonds can underperform at certain points in time.

What to Consider Before Investing and Why Long Term Investing is Key

As you begin your investing journey, consider first where you’d like to hold your investments. That could be a taxable brokerage account, an employer’s 401(k), or a tax-advantaged IRA. If you want to invest in real estate, decide if physical properties or REITs match your investment style. 

Then, assess your risk tolerance and how long you want to invest. Keep in mind that, due to compound interest, investing long-term (10+ years) is the most assured way to grow your money. 

It’s perfectly fine to invest entirely in low-cost, diversified index funds. “Adequately diversified investments with a long track record of growth is the key to building wealth,” says Stohmeier. That way, you’re also able to withstand market dips while giving your cash the best chance to grow.

Ride a Winner

Peter Lynch famously spoke about “tenbaggers“—investments that increased tenfold in value. He attributed his success to a small number of these stocks in his portfolio.

But this required the discipline of hanging onto stocks even after they’ve increased by many multiples, if he thought there was still significant upside potential. The takeaway: avoid clinging to arbitrary rules, and consider a stock on its own merits.


3. Choose the right level of risk

If you're young with decades ahead of you to save, you can likely afford to take on a higher level of risk than someone in their 50s or 60s. Make sure that you're taking on enough — but not too much — and stick with it.

"Investing is not for the faint of heart," Holeman says. "The stock market goes up and down very frequently and if you follow the news, you would think that every day is the impending doom for the stock market and that can be scary."

Instead of dwelling on the daily upsets of the market, think about the variables that are within reach. "You cannot control the stock market, that is out of your power," Holeman adds. "But you can control your fees, your taxes, your risk, and your behavior."

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Other Types of Investment Strategies

As an investor, you may decide to add other types of investments to your portfolio. Types of securities you can add might be higher risk, but can compliment your index funds. Whatever other securities you decide to add, make sure you align them with your investment goals and do some research before to make sure you know what you’re investing in.

Small Cap Stocks

A small cap stock is one from a company with market capitalization under $2 billion. These stocks can be a way to invest in companies that are poised for long-term growth and fast gains. 

Adding small cap stocks to your portfolio through an index fund is a good way to incorporate small cap stocks to your investment strategy. A popular small cap index fund is the Russell 2000 index which tracks 2,000 small cap companies across a variety of industries. Of course, there’s no guarantee that a small company will survive, and initial performance isn’t a guarantee it will continue. 

Blue Chip Stocks

Blue chip stocks are shares of large, well-known companies that are household names – think Disney, Amazon, and Johnson & Johnson. These stocks are thought of as being reliable, safe, and able to weather economic downturns over the long-term. 

To identify blue chip stocks, take a look at the Dow Jones Industrial Average. Because they have a proven track record, having blue chip stocks can add stability and reliability to your portfolio. If you have an S&P 500 or total market index fund, chances are you have good exposure to these stocks already. A blue chip index fund or ETF is a good way to start investing in these. The SPDR Dow Jones Industrial Average ETF Trust is one of the most popular blue chip funds because of its low fees. You can also purchase shares directly through your brokerage. 

Real Estate and/or REITs

Buying a property often requires upfront costs like down payment and fees for closing, on top of any renovations you choose to make. There are also ongoing (and perhaps unexpected) costs, like maintenance, repairs, dealing with tenants, and vacancies if you decide to rent out the property. 

If homeownership isn’t for you, you can still invest in real estate through real estate investment trusts (REITs). REITs allow you to buy shares of a real estate portfolio with properties located across the country. They’re publicly traded and have the potential for high dividends and long-term gains. 

“REITs have done superbly well this year. They don’t usually do well with a pandemic, but surprisingly, they have,” says Luis Strohmeier, certified financial planner, partner, and advisor at Octavia Wealth Advisors. Part of the reason is you get access to properties, such as commercial real estate and multi-family apartment complexes, that could be out-of-reach for an individual investor.  

On the flip side, dividend payments earned through REITs are taxed as ordinary income instead of qualified dividends, which may cause you to have a higher tax bill if you invest through a taxable brokerage account. When you invest in a REIT, you’re also inherently trusting the management company to scout income-producing properties and manage them correctly. You don’t get a say in which properties the REIT chooses to purchase. But with that said, you don’t have to deal with tenants, repairs, or find a big down payment to start investing. And if you can invest through a tax-advantaged account, the dividends could grow tax-free. 

Final Thoughts on the Best Long-Term Investments

There’s something of an ongoing debate between which is the best long-term investment – stocks, bonds, or real estate. But from an investment standpoint, it’s a debate that’s probably not worth spending too much time on.

The best course of action is usually to put some money into each of the three.

Different investment assets outperform others in different financial markets. Stocks may be the primary investment today, but real estate might take its place in a few years, and bonds after that.

Focus less on which asset class you should favor, and more on achieving a solid allocation between the three.

Since we can’t know what the future holds, and how investments will perform, the best strategy is to be invested in all three, at all times.

Enjoying a longer life

People are living longer these days, meaning your retirement savings may have to last a long time as well. How long? According to the Social Security Administration1

  • A 65-year-old man can expect to live, on average, to 84.1.
  • A 65-year-old woman can expect to live, on average, until age 86.7

Longevity trends suggest that these remarkable numbers will continue to rise.

Your total investment time horizon is longer than you may have thought. Depending on your age today, you could be creating and managing an investment strategy for 20 years or more to ensure you don’t outlive your retirement savings.

Why are long-term investments good?

Long-term investments give you the opportunity to earn more than you can from short-term investments. The catch is that you have to take a long-term perspective, and not be scared out of the market because the investment has fallen or because you want to sell for a quick profit.

And by focusing on the long term – committing not to sell your investments as the market dips – you’ll be able to avoid the short-term noise that derails many investors. For example, investors in the S&P 500 who held on after the huge drop in early 2020 were likely able to ride out the short-term bumps that came along with the start of the COVID pandemic before markets turned things around and surged higher once again.

Investing for the long term also means that you don’t need to focus on the market all the time the way that short-term traders do. You can invest your money regularly on autopilot, and then spend your time on things that you really love rather than worrying about the market’s moves.

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