7 Principles of Long-Term Investing
Increasing your wealth over time is about more than making the right stock picks or always buying low and selling high. We have compiled this list of seven principles of long-term investing. These are by no means exhaustive, nor will they guarantee investment success, but we hope that you will find them useful in helping you make investment decisions
1. Focus On The Total Real Return Of Your Investments
To maximize investment growth over time, it’s critical to factor in the effects of fees, taxes and inflation on your returns. Incorporating tax efficiency into your overall plan will help you keep more of what you earn.
Inflation is another force that can eat away at investment growth each year. A candy bar that cost 25 cents in 1975 would cost over a dollar today, due to the effects of rising prices. In an effort to reduce risk, many people over-invest in fixed-income securities, which are highly exposed to inflation risk since they do not have the same potential for capital appreciation as equities. We recommend that our clients’ portfolios contain enough exposure to equities for their ability to fight inflation through growth.
2. Don’t Chase the Crowd
It is usually wise to avoid following the herd. By the time your friends, family, neighbors and newspaper columnists are all investing in a particular sector or security, it’s often too late to benefit because hype has already inflated the price. Instead, we strongly encourage an investment strategy that is based on objective research using the best information available, calculated choices, a realistic assessment of risk, and a determination to avoid emotional decision-making.
3. Remain Flexible and Diversified
Diversification is one of the pillars of modern investment theory and can be a powerful tool to reduce certain types of risk in your portfolio. Be sure that your overall portfolio contains a variety of quality investment types, including stocks, bonds, international securities, and a few alternative investments if your risk profile and investment goals support them.
4. Buy Value, Not Market Trends
Wise investors focus on value when evaluating investment options. Too many investors focus on buying market trends not realizing that trends can be deceiving and markets often perform very differently from the economy. A smart investor keeps an eye on the economy and factors economic outlook into investment decisions, but ultimately seeks out high-quality individual investments.
5. Take the Right Amount of Risk
Too much risk can leave your nest egg vulnerable to market swings with too little time to recover before you must start withdrawing money and locking in the losses. Too little risk in your portfolio will reduce your potential for capital appreciation and allow inflation to eat away at the long-term value of your investments. Determining risk tolerance and the appropriate amount of risk for your investment goals is one of the most important things we help our clients with.
6. Learn From Your Mistakes
One of the key differences between successful long-term investors and those who are not, is that successful people learn from their own mistakes and commit to never making the same mistakes twice. Many common investing mistakes can be attributed to emotional decision-making, but working with a financial professional can help avoid emotional decision-making and many other pitfalls commonly encountered by amateur investors.
7. Aggressively Monitor Your Investments, or Pay Someone Skilled To Do It
No market rally is permanent and no decline lasts forever, meaning that there are no investments that you can buy and forget about. If you aren’t completely sure that you have the time it takes to manage your investments well, it may be time to find a professional financial representative with the skills and experience to do it for you.