Long-Term Investing Strategies That Work
These 5 investing strategies could set you up for long-term financial success.
It hasn’t been easy to be an investor this year, with stocks, bonds, and even crypto all seeing negative returns. It’s easy to get sidetracked by short-term volatility and not set aside money for investing every month. But the truth is that every dollar you invest into the markets today is working hard for you over time.
So how can you set yourself up for long-term financial success, regardless of how volatile the markets are? It comes down to creating the right habits and sticking to a sensible investment strategy.
Just how long is a long-term investment?
Typically, investments with a time horizon above 5 to 7 years are considered long-term investments, and those with a holding period of under 3 to 5 years can be considered short term. You can read more about long-term versus short-term investments and how to adjust your portfolios depending on your investment horizon. What are the benefits of long-term investing?
If you’ve decided that you’re prepared to invest for the long haul, here are just a few of the benefits it could bring you:
- Investing for the long term helps you ride out the market’s ups and downs
- A longer time in the markets gives your money the greatest chance of growing through the power of compound returns
- Staying focused on your long-term goals could save you from making emotional investing decisions
Taking a step back to look at the bigger picture always helps. Looking at the returns of the S&P 500 between late 2018 and early 2019, we see significant price fluctuations, and it looks like the index ends roughly flat.
But zoom out and you’ll see that the S&P 500 index has historically always been able to recover and maintain an upward trend.
So arming yourself with a big-picture approach and the right long-term investing strategy could put you well on your way to achieve your financial goals.
Here are the fool-proof long-term investing strategies that actually work
1. Invest consistently (aka. dollar-cost average)
Dollar-cost averaging, or DCA, is simply the practice of investing equal amounts of money at regular intervals – be it weekly, monthly, or quarterly. Dollar-cost averaging your investments into a diversified portfolio frees you from trying to time the market, which is nearly impossible to do correctly. In other words, just focus on investing consistently with each paycheck.
When you dollar-cost average over the long term, the times you buy at a high price and the times you buy low average out, reducing your risk and letting your returns grow with the markets. The best part? Dollar-cost averaging removes a lot of the mental load from investing: Committing to a set schedule means you don’t have to worry about whether the markets are going up or down.
2. Buy and hold your investments to harness the power of compounding
Compound interest is the interest you earn on interest. To illustrate, if you were to save $1,000 USD, and earn 10% yearly in interest:
- At the end of one year you would have $1,100 USD.
- The next year, you would earn interest, not on $1,000 USD, but on $1,100 USD, bringing your asset value to $1,210 USD.
- And, by the end of 20 years, your initial $1,000 USD would have grown to $7,400 USD, earning you $6,400 USD in interest.
The power of compounding applies to investment returns too. Starting early and keeping your money in the markets lets you take advantage of the higher returns from compounding, giving you the best chance of reaching your financial goals sooner.
3. Don’t check your investments too often
Investors feel the pain of an investment loss twice as strongly as they feel joy at an equivalent gain. In behavioural finance, this cognitive bias is known as loss aversion.
Loss aversion can lead to an investor taking too little risk or even no risk. For example, when markets are volatile, loss-averse investors are more likely to sell out of their investments to minimise losses. These investors often only continue investing after the markets have recovered, meaning that they end up buying high and selling low.
Here’s a tip that could help you maintain perspective when markets are volatile: Try not to check your portfolio too often. Over-monitoring your investment returns makes it more likely that you’ll have a knee-jerk reaction to short-term volatility, jeopardising your long-term returns.
4. Stay true to your risk appetite
Knowing your risk appetite, and making sure your portfolio matches your risk tolerance, helps you stick to your investment plan when times are tough.
All our portfolios allow you to select your risk level when you set them up. In particular, General Investing powered by StashAway is designed to provide broad diversification while keeping your risk constant in any economic environment.
Our Responsible Investing portfolios have the same risk management as StashAway’s classic General Investing portfolios, and are also optimised for ESG impact.
5. Have a diversified portfolio
Spreading your investments between different asset classes and geographies helps to smooth out your returns over the long term. Maintaining a well-diversified portfolio also protects you from the risk of large declines in any single asset.
StashAway’s investment framework, ERAA®, diversifies its portfolios by choosing an optimal asset allocation for the given economic environment.
On the other hand, General Investing powered by BlackRock® is our broadest, most diversified portfolio, with 15-25 underlying ETFs.
Investing for the long term isn’t easy, but it’s worth it
Markets will always be volatile, and we never know when the next bull or bear market will hit us. But if you’re looking to generate long-term returns? Then the earlier you start, the better.
If you invest regularly, maintain a diversified portfolio, and stay true to your risk preference, you’ll find it easier to ride out any market fluctuations. And from there, it’s a matter of sitting back and letting your returns compound over the years.
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