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Investing for the Long Run – 9 Tips to Get the Best Long-Term Returns

The longer you have to invest, the more money you’ll be able to accumulate before retirement, not just because you’ll have more money to put into your investment account over time, but because compounding gains are the stock market’s superpower.

When you make an investment, and that investment starts to generate returns, the returns you’ve generated will start to work for you as well. To give you an idea of just how powerful compounding gains are, imagine you started your long-term investing plans with just $750 and added another $750 to it each month.

After 20 years, you would have contributed $180,000. But if you earned an average annual return from the stock market of 10% during that time, you would end up with $543,740.

The longer these compounding gains have to work for you, the more compelling your investment returns become. Adding another 10 years to the $750 monthly investing plan would bring your total after 30 years to $1,560,219, nearly tripling your 20-year total.

So, making the decision to start investing for the long run now sets the stage for you to achieve financial security and even become a millionaire over time.

How to Make Wise Long-Term Investment Decisions

Most of us know we should be investing for the long term, but it’s not something everyone learns how to do in school. Unless you studied for an MBA or to become a financial advisor or stock market analyst, there’s a strong chance that you didn’t learn much about the stock market or investing even if you went to college.

As a consequence, the average American simply doesn’t know much about the stock market or how to get started investing. Many beginners view the stock market as a complex machine that only experts should be involved in.

Thanks to technological innovation, discount online brokerages like M1 Finance provide access to the market that the average person simply didn’t have in the past.

Moreover, because commissions are largely a thing of the past in self-directed investment accounts, the cost of accessing the stock market is vastly lower than it has been in the past.

Once you get started, you’ll find that investing isn’t quite as difficult as most people think it is. Like most other activities in life, your success is largely dependent on your willingness to apply yourself.

By keeping the tips below in mind, you’ll have all you need to build a successful long-term investing strategy.

1. Don’t Get Sucked Into Short-Term Investing Strategies

There’s quite a bit of noise in the stock market. Every day you’ll see articles suggesting now is the time to buy this stock or sell that stock. As you do your research, you’ll come across plenty of advertisements that show stock traders standing next to private jets, yachts, huge houses, and beautiful people.

These messages and advertisements often sucker newcomer investors into the short-term trading game — one that’s more of a gamble than an investment.

Sure, there are plenty of people who make money as short-term traders. However, these investors are experts who have a deep understanding of the stock market and of technical indicators that the average investor simply doesn’t have.

As a long-term investor, don’t pay attention to the noise that has the potential to sway you from your financial goals and lead to significant short-term losses.

Pro tip: If you’re going to add new investments to your portfolio, make sure you choose the best possible companies. Stock screeners like Seeking Alpha can help you narrow down the choices to companies that meet your requirements. Learn more about our favorite stock screeners.

2. Choose Your Investing Strategy Wisely

Whether you’re investing in individual stocks or investment-grade funds, your investment strategy will be your lifeline throughout the process. Once you’ve tied down a solid investing strategy, it will guide you through your decisions, taking the guesswork out of the equation.

Common Investing Strategies

There are tons of investing strategies to choose from. However, three strategies are the most common, largely because they have proven to be simple and effective, making them great options for investors of all skill levels. These strategies include:

  • Growth Investing. Growth investing is the process of investing in stocks that are already experiencing — and likely to continue experiencing — compelling growth. The idea is to buy into companies that are just beginning to tap into a wide audience, leading to outsize growth in both revenue and earnings. The growth in revenue and earnings ultimately equates to growth in the value of the stock, leading to returns that have the potential to beat the market.
  • Value Investing. Value investors look at the stock market through a completely different lens. Instead of looking for stocks that are already experiencing compelling value growth, these investors look for stocks that the market largely undervalues. By investing in these stocks, you enjoy a discount on their purchase. Then, when other investors start to realize the stock is undervalued and buy into it, the price moves up to or above the valuations given to comparable stocks, resulting in strong gains.
  • Index Investing or Fund Investing. Finally, many investors look to diversified investment-grade funds like index funds, mutual funds, and exchange-traded funds (ETFs) as a way to invest in the entire market or in particular sectors. These funds pool money from a large group of investors to invest according to their stated investment strategy and share the profits with all investors in the fund. Fund investing is a great way to go for the investor who doesn’t have the time or inclination to do the extensive research it takes to become a successful stock picker. Investing in a fund over time takes the decision-making out of your investing; you can keep adding money to the same fund over many years as long as it remains in keeping with your goals — some platforms even allow you to automate your contributions. Moreover, investment-grade funds are highly diversified investments, protecting investors from volatility in any given stock within the fund’s investment portfolio.

3. Stick to Your Investing Strategy

Once you have an investing strategy that you know works, the most important part of investing becomes sticking to it.

All too often, newcomer investors stray from their strategy in an attempt to cut perceived losses or to chase the potential to increase gains, only to find that they made their move too early or too late, leading to losses.

Sticking to your strategy helps you ensure you’re buying and selling at the right time, choosing the right investment opportunities, and making wise investment decisions.

Check Your Emotions at the Door

When beginner investors stray from their chosen investing strategy, it’s usually an emotional action. The stock market is an emotional place, primarily driven by two key emotions: fear and greed.

Fear of loss is the reason you may back out of an investment too early, missing out on a rebound. Greed is the reason you’ll find yourself wanting to chase a trend higher, even when your investing strategy tells you that it’s time to take profits.

By checking your emotions at the door, you won’t make these kinds of mistakes.

Know When to Call It a Day

Sometimes it’s hard not to rebel against your investing strategy and do what feels right when working in the market. When those times come, it’s time to stop looking at the market for the day.

Taking your mind away from the stock market and focusing on something else when you’re feeling overwhelmed or tempted to make an impulsive decision will allow you to more clearly focus when you come back in the next trading session.

Rebalance Your Portfolio to Keep It in Line With Your Investing Strategy

When investing with a long-term time horizon, stocks you purchase will change in value, often falling out of line with your investing strategy. That’s why most investors rebalance their investment portfolio once quarterly, with some investors rebalancing monthly.

To rebalance your investment portfolio, dive into all of your holdings as if it were the first time you researched them. Take a look at valuation metrics, growth metrics, and the performance of the asset since it’s been in your portfolio.

If everything is still in line and the asset still fits into your investing strategy, that’s great news — it’s time to dig into the next one. However, you may find that many assets simply don’t fit your criteria anymore, making it time to sell some holdings and look for new opportunities.

4. Choose Your Funds Wisely

If you’re not interested in building an investment portfolio of individual stocks and bonds, or in the research and time commitment required, investment-grade funds are a great way to go. Plenty of investors have retired comfortably as the result of successful long-term investments in ETFs, index funds, and mutual funds.

However, like stocks, not all investment-grade funds are created equal. Each will follow its own investment strategy and come with its own cost structure, management team, and historical performance.

So, when choosing an investment-grade fund to purchase, it’s important to pay attention to the following:

Look Into Expense Ratios

Investment-grade funds come with expenses. First, there is the cost of trading. Also, professionally managed funds have a team consisting of the fund manager, analysts, and traders, all of whom expect a paycheck for their hard work.

Before investing in these funds, it’s important to get an understanding of the fees that you’ll be paying to do so. These fees are easy to understand thanks to a metric known as the expense ratio.

Passively managed funds like ETFs and index funds tend to come with lower expense ratios — on average 0.44% and 0.74%, respectively, according to Wyatt Investment Research. Actively managed mutual funds come with higher expense ratios, averaging from 0.6% to 1.14%, according to The Balance.

Keep in mind that the higher the expense ratio is, the more the cost of the investment will cut into your potential gains. As such, if you choose to invest in actively managed funds with higher expense ratios, make sure there is a history of exceptional returns to counteract the higher fees.

Research Past Performance

Although some investment-grade funds are similar, no two will perform exactly the same. So, it’s wise to look into the past performance of the fund. While past performance isn’t always an indication of future performance, it can give you confidence that the fund you’re investing in has a history of success.

When looking into the past performance, pay attention to the average annual return over the past one year, three years, and five years at the least. The farther back you go, the more insight you’ll have into the fund’s long-term performance.

Dive Into Management

Investment-grade funds typically have a team that includes the fund manager, analysts, and traders. Over time, the people in roles can change, leading to changes in the performance of the fund as a whole.

Before investing in an ETF, mutual fund, or index fund, take a moment to look into the management of the fund and how long they’ve been at the helm of operations.

These people will be handling your money. Although you may not be able to shake their hands and look them in the eye, you can use the Internet to get to know more about them before trusting them with your hard-earned cash.

Consider the Fund’s Investing Strategy

Index funds invest in every asset listed on the underlying stock market index the fund is centered around. For example, a Nasdaq Composite index fund will invest in every stock listed on the Nasdaq stock exchange.

ETFs get a little more complicated. Although they offer broad diversification, they can be designed to provide exposure to a specific index, group of indexes, type of market, industry, or even company size, following specific criteria for which stocks to add to the investment portfolio and at what times.

Mutual funds have the most complex investing strategy of the three. These funds are actively managed, meaning the traders at these funds are constantly busy looking for the next opportunity that falls in line with their strategy.

Due to the complexity of investing strategy and the cost involved in mutual funds, they’re not necessarily the best bet for beginners. If you’ve been in the market for a little while and know what to look for in a solid investing strategy, they could be a strong choice for you.

5. Practice Diversification Within Your Investment Portfolio

When investing in investment-grade funds, diversification is baked into the portfolios you’re investing in. However, if you choose to go the individual stock route, it’s important to maintain a diversified portfolio of your own.

A general rule of thumb to follow to ensure your investment portfolio is diversified is known as the 5% rule. It suggests you limit your investment in any single stock to 5% of your investment portfolio and in any group of high-risk stocks to 5% of your portfolio.

For example, if you have $10,000 to invest, the 5% rule suggests you should never invest more than $500 in any single stock, nor should you invest more than $500 in any group of high-risk stocks.

Keep in mind the 5% rule provides a self-imposed cap, not a minimum investment. If you’re not totally confident in a stock you’re considering but you want some exposure, the rule allows you to invest as little as you’re comfortable with.

6. Avoid Low-Return Investments

Higher returns don’t always have to come with higher risk. There are plenty of long-term investors who beat the market using investing strategies like the growth strategy, value strategy, or dividend stock strategy, that are based on well-researched investment decisions that give the investor an upper hand in the market.

Often investors look to low-return investments to avoid undue risk. While including bonds in your allocation as a hedge against risk is fine, allocating too much of your money to low-risk investments — especially when you’re young — will cost you in the long run.

Moreover, there are quite a few low-risk investments that actually cost you money because their returns don’t always keep up with inflation.

Low-Return Investments to Avoid

The most notable low-risk investments to keep out of your investment portfolio include:

  • Savings Accounts. Savings accounts provide minimal interest rates, rarely keeping up with inflation. However, they’re very safe, offering FDIC insurance on balances up to $250,000 and making people feel comfortable. Sure, it’s wise to have some money in savings for an emergency fund, but keep in mind that for every dollar you have in a savings account is slowly losing buying power over time. So, keep your savings to what you will need for emergencies, investing the rest of your money in higher return opportunities.
  • Certificates of Deposit (CDs). According to CNBC, the average return on a three-year CD as of March 2021 is 0.26% APY. That’s peanuts considering the United States inflation rate averaged 1.67% from 2010 to 2020 according to Statista. Moreover, CDs are illiquid, requiring you to hold your money in them for long periods of time, making them unattractive as a quick-access emergency fund.
  • Money Market Funds. According to Forbes, many money market funds don’t yield returns at all. Moreover, high-yield money market funds only produce returns of around 0.10% annually. That’s hardly worth taking the time to open an account.

7. Adjust Your Asset Allocation for Your Risk Tolerance and Time Horizon

A well-diversified long-term investing portfolio will include multiple asset classes. Some will be high-return asset classes like stocks, ETFs, index funds, and mutual funds. Others will be low-risk assets used to avoid significant losses should the market take a dive, like treasury bonds, municipal bonds, and bond funds.

Keeping in mind that bonds will generally produce lower returns than high-return assets. It’s important to have enough of them in your investment portfolio to protect you from the significant losses of widespread bear markets. Tut you don’t want to hold too much of your money in them at the expense of long-term growth — especially if you’re young and not planning on tapping into your portfolio any time soon.

Your age can be a guide for the perfect balance between risk and reward in terms of asset allocation. Simply use your age to determine your low-risk asset allocation.

For example, if you’re 25 years old, you might want 25% of your investment portfolio to consist of assets like bonds and bond funds, with the other 75% of your portfolio being allocated to higher-return investments. As you age and your time horizon shrinks, your risk tolerance will start to decline as well, so you’ll gradually adjust your asset allocation accordingly.

After all, the amount of time for recovery from any significant declines in your portfolio shortens as you age. Using this strategy, you’ll constantly adjust your portfolio and the risk you accept within it throughout the long run.

8. Consider Retirement Investments

When you jump into the stock market, you might think about buying individual stocks, ETFs, and other assets through a self-directed investment account at a brokerage.

However, when you invest in a normal brokerage account, you’ll have to pay taxes on the money you use to invest and on the gains you make through your investments.

Tax-advantaged retirement accounts act as tax shields, and because you’re planning on investing with a longer time frame, they’re a perfect fit.

Moreover, with most types of individual retirement accounts (IRAs) you have full control over how you invest your retirement funds, allowing you to make the investment decisions you want to make while providing the tax shelter these types of investments provide.

9. Consider Investing With Robo-Advisors

As technological innovation continues to change the world of finance, more and more opportunities are being created for the individual investor. One of the newer, overwhelmingly popular investing opportunities is the robo-advisor.

With robo-advisors, all you need to do is deposit money and the rest happens automatically. The robo-advisor will make your investments for you, generally across a long list of ETFs, index funds, and bond funds.

Robo-advisors have become popular because they not only bring simplicity to the investing process, they are known to create compelling gains.

Some of the most popular robo-advisors online today include:

  • Betterment. Betterment is a pioneer in the robo-advisor industry. Founded in 2008, Betterment now serves more than 500,00 investors, managing more than $20 billion on behalf of its members, according to Bloomberg.
  • Acorns. Founded in 2012, Acorns hit the robo-advisor market with a splash, offering up one of the first real competitors to Betterment. Using a micro-investing model, promoting wealth-building through a series of small, painless investments, Acorns grew to more than 4.5 million users by 2019, according to CNBC.
  • Stash. Founded in 2015, Stash is one of the newer robo-advisors on the street. However, they are growing quickly; the company already has 5 million subscribers and serves 1.7 million customers, according to TechCrunch.
  • Vanguard. Vanguard is one of the best-known fund managers on Wall Street today. Aside from the traditional brokerage services offered and the wide array of mutual funds, ETFs, and index funds the company offers, it is also one of the leading robo-advisors available today. All told, the company has well over $6 trillion in assets under management.

Final Word

Investing for the long run is a wise decision. Doing so sets the stage for long-term financial stability and the potential to build wealth. As you start to invest, you’ll find that the process is highly rewarding when done properly, and it can place you on the financial foundation that you want and deserve for the rest of your life.

If you’re not sure how to get started, some of the top online brokers and investing training websites offer free access to trading simulators. With these simulators, you’re assigned virtual money that you’re able to trade in real time, letting you test your strategy before you risk real money.

Some of these simulators let you back-test your strategy to see how it would have played out over the long run, so you can get a sense of how your strategies tend to perform over time without having to wait years or decades into the future.

By following the tips above, you’ll find yourself with a well-researched, well-diversified portfolio of investments that follow a clearly outlined investing strategy to give you peace of mind in knowing you’re prepared for the future.

Joshua Rodriguez has worked in the finance and investing industry for more than a decade. In 2012, he decided he was ready to break free from the 9 to 5 rat race. By 2013, he became his own boss and hasn’t looked back since. Today, Joshua enjoys sharing his experience and expertise with up and comers to help enrich the financial lives of the masses rather than fuel the ongoing economic divide. When he’s not writing, helping up and comers in the freelance industry, and making his own investments and wise financial decisions, Joshua enjoys spending time with his wife, son, daughter, and eight large breed dogs. See what Joshua is up to by following his Twitter or contact him through his website, CNA Finance.

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