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Long-term investing is one of the most efficient investment strategies there is.
What makes long-term investing so appealing to many investors is that it allows your returns to compound, has a relatively low risk level, and is overall a low-expense investment strategy.
Long-term investing is a mix of patience, discipline, and skill.
While there are countless different long-term investment styles, there are certain basic rules for long-term investing that are guaranteed to bring you success.
Financial Stability
First of all, no matter what kind of investor you are or what your investment goals are, you need to have your finances in order to be successful in the long term.
When you have a strong financial foundation, you’re not forced to sell your stocks at a loss to pay for surprising expenses.
The first thing to do to achieve financial stability is to make sure you have a monthly budget surplus. If you’re new to budgeting, you can use this budgeting guide for beginners to help you!
After you have your budgeting in order, you can use some of that surplus money to build an emergency fund before you use all your extra income for investments.
In an ideal situation, you have a decent-sized emergency fund, some money left over every month, and an ever-growing portfolio of investments.
So, in a way, there are three types of money: money you keep in your checking account, money you have in your savings account for emergencies, and money in your investments.
It’s best to have the first two in check to ensure you reach your long-term investing goals.
Having strong financials goes double for investors who like to take on a lot of risks since, when it comes to stocks, there is a very real chance of losing money.
Start as Early as Possible
If there’s one thing that financial advisors love, it’s telling people to start investing as early as possible.
In this regard, I’m no different.
The sooner you start investing the better your results will be because there is more time for compounding returns. This is the main reason why you should start investing early on.
Another reason is that when you have fewer responsibilities and expenses, you can invest more.
Personally, I think the best time to invest is when you’re young, have a decent salary, and have no family or mortgages. In other words, you have lots of income compared to your expenses.
Youth is usually also the time one can invest heavily and possibly take more risks since there are fewer responsibilities and people to take care of.
It’s also important to remember that to start investing, you don’t need a lot of capital. If you start to invest regularly with a monthly investment plan, for example, you can get started with very little.
Define Your Personal Risk Tolerance
One of the first things any investor should do is to correctly define one’s risk profile. Your risk profile determines what you should invest in and for how long.
The core idea of the relationship between risk and reward is that the more returns you want, the more risk you need to take. For example, if you don’t want to take a lot of market risk, you might want to invest in bonds or real estate in addition to stocks.
Although it’s not as straightforward as it sounds at first, it does give you a general idea of risk and return.
While the media tends to glorify steel-nerved risk-takers, taking too much risk is generally not a good idea.
Taking too much risk leads to hasty decisions and makes it hard to maintain your investment plan. Especially if you invest money that you can’t afford to lose.
The longer you invest, the more familiar you become with how much risk exposure you can have.
If you’ve overestimated your risk tolerance, you can always readjust your portfolio.
More often than not, there’s no need to make drastic changes, just adjust your risk level little by little toward a more sustainable level.
Stick to Your Investment Plan
It’s extremely difficult to reach your long-term investment goals if you have no plan. A successfully laid investment plan is what gives you your long-term destination and short-term direction.
Let’s say you plan to be a regular long-term investor and invest monthly in passive index funds.
You would decide to invest monthly in, for example, S&P 500 for 30 years. If you stick to your plan, it would be extremely unlikely to lose money.
Ironically, the biggest threat to an investor is the investor himself. This is why successful investing has equally as much to do with psychology as it does with numbers.
The thing is that we humans don’t do so well with things that require a long-term perspective.
Investing is the kind of sport that has little going on for the first decade but has a tremendous amount of action a few decades later. As you can imagine, the first years are the hardest.
Your investment plan is what keeps you on the right track during times of doubt. I bet there’s not a single investor in the whole wide world who hasn’t doubted himself at one point.
Having a solid investment plan prevents you from making rushed decisions, keeps you on the right track, and reminds you of your long-term financial goals.
Ignore Short-Term Market Volatility
In the short term, market fluctuations seem to be mostly random.
For a long-term investor, short-term market movements and intraday market volatility have next to no meaning at all.
There’s no real reason why a long-term investor should check the market every day. Not only is it a complete waste of time, but it will also generate needless stress over something you have absolutely no control over.
If you check out stock prices every day, you’re mostly watching the stock price going back and forth without any significant informational value behind the movement.
What you should be focusing on instead, if you are a stock-picker, is how the companies you’ve invested in are really doing.
The best way to stay on top of things is to read quarterly and annual reports of the companies you’re either invested in or are planning to invest in.
For index fund investors, there’s really no point in checking daily how the index is doing – except maybe for entertainment purposes.
Unfortunately, checking stock prices is extremely easy.
Too easy, some might say. For some investors, checking their portfolios has become the new Facebook.
For a long-term investor, constantly checking your investments can lead to short-term thinking and hasty investment decisions.
Be Patient
Being a successful long-term investor is all about patience. Accumulating wealth through investing takes time. A lot of time.
While there are investors (usually day traders) who can make satisfying returns very quickly, that’s not how it works for most people. The reason for this is that the success rate for traders is extremely low.
It’s important to realize the difference between how day traders and long-term investors make money.
A day trader uses short-term stock price movements to make a profit. It has nothing to do with the underlying business.
Long-term investment strategy, on the other hand, has everything to do with the business model. Sometimes investors tend to forget that when they buy a stock, they buy the business.
The longer you stay invested, the more important the fundamentals of a company become. If the company does well, it’s likely that sooner or later the stock price will inevitably follow.
A company doesn’t grow overnight, and neither does your portfolio. Therefore, a long-term investor needs the patience to let his investments grow.
Give Up on Timing
One of the greatest lessons I’ve learned through the years is that timing is HARD.
Stocks that are too expensive to buy can continue to be at an all-time high for decades, and stocks that can’t possibly go any lower can most definitely go a lot lower.
For me, timing is not a working investment strategy. It’s simply because I have no idea how to do it successfully.
The great thing about long-term investing is that the longer your investment time horizon is, the less important timing becomes.
If you own a great company for 20 years, it doesn’t likely matter if you happened to pay a little too much for it at the time. You neither have to worry about the right time to sell the stock.
Even if you happened to buy stocks right when the stock market went downhill, you will likely rebound eventually. An average bear market lasts a lot shorter than an average bull market.
Of course, past performance is not an indicator of future profits, and it might take some time before the market eventually gathers itself, but it will most likely do so.
The simplest and the most guaranteed way of getting satisfying returns is to invest monthly and diversify through time with dollar-cost-averaging. This way you don’t need to time the market at all.
Stay Invested
The longer you stay in the market with a well-diversified portfolio, the less likely you are to lose your money.
For example, if you would own S&P 500 for 30 years, the chances that you lose money are quite minimal.
The problem is that some investors start with a long-term mindset but somewhere along the way they get lost and become short-term speculators.
Usually, the reason for this is that the returns they’re expecting are not happening. This isn’t because there’s something wrong with their investments, it’s simply because they’re not giving it enough time.
Achieving compounding takes time. If you invest for just a few years, there won’t be much compounding going on because there’s nothing to compound.
Also, statistically speaking, it pays to stay. For example, between 1999 and 2018, if you’d been fully invested in the S&P 500, you would’ve had an annualized performance of 5.62 %.
BUT, if you’d missed out on 20 of the best days in the market during that time, your annualized returns would’ve been -.33%.
In other words, it only takes 20 missed days in 20 years to ruin your portfolio performance.
Have a Diversified Portfolio
One of the foundational rules of investing is to not put all your eggs in the same basket.
It has become a saying for a reason, and that’s simply because asset allocation and diversification inside asset classes do matter.
This is not to say that some investors can’t do well with little diversification, but it does require a great amount of risk tolerance.
If you invest in individual stocks and want to have a focused portfolio, you need to pick the right stocks. Unfortunately, there’s a very real chance that you won’t.
The stock market works in mysterious ways, and one of the universal truths is that most stock pickers will not beat the market.
Diversifying decreases your risk level and helps you avoid big losses. There’s a reason why investors diversify, and that is the fact that no one can predict the future.
Not only can you and possibly should diversify across countries and asset classes, but you can also diversify through time with dollar-cost averaging.
For a long-term investor, it’s essential to stay invested for a long time. Diversifying is the thing that keeps you in the game and helps you reach your financial goals.
Reinvest Your Dividends
The difference between reinvesting dividends and spending them on something else is huge.
For example, if you’d bought S&P 500 in 1970 for $10,000, it would’ve grown to over $350,000 in the next 50 years.
Here’s the twist: if you’d reinvested all dividends, you would have over $1.6 million instead of $350,000.
So, if you don’t reinvest your dividends, you’ll still get some profits, but not nearly as much as you could have.
As a long-term investor who spends his whole life in the market, this difference will grow to be significant.
Don’t Compare Yourself to Other Investors
I saved this one for last because it’s the most common and most dangerous mistake a long-term investor can make.
In this age of social media, it’s extremely hard to resist the temptation of comparing portfolio returns with other investors. While it can, in some cases, be an educational endeavour, it often results in doubt and disappointment.
If you absolutely need to compare yourself to other investors, make sure they’re playing the same game as you are.
As a long-term investor, it makes zero sense to compare yourself to a short-term investor.
Even if you compare portfolios with another long-term investor, there can still be huge differences in your investment strategy.
For example, one investor can invest in aggressive growth companies while another invests in large companies that have a high dividend yield.
Needless to say, there can be huge differences in portfolio performance, even though both are long-term investors.
Comparing portfolios is a dangerous sport that promises little rewards, which is why I would be extremely cautious when comparing portfolios. If you know what you’re doing and have laid down a solid financial plan, it’s worth it to trust your own investing ideas.
