Investing is a long game. Whether you want to invest for retirement or increase your savings, it is best to manage and forget about when you are spending money working in the market. However, successful long-term investing is not as easy as investing money in the stock market. Here are seven tips for successfully dealing with long-term investments.
1. Manage your finances
Before you can invest in the long term, you need to know how much money you should invest. That means managing your finances.
“Investment portfolios should not be recommended until the client has gone through a comprehensive financial planning process so a doctor doesn’t prescribe it without first diagnosing you,” says San Diego-based certified financial planner Taylor Schulte (CFP) and host of the StayWealthyPodcast.
First, save your assets and debts, develop a rational debt management plan, and understand how much you need to fully stock up on your emergency fund. By tackling these financial tasks in advance, you will be able to invest in long-term investments and not have to withdraw funds again for some time.
Early withdrawal of funds from long-term investments can fail to achieve your goals, force you to sell at a loss, and potentially have a high tax impact.
2. Know your time span
Investment goals vary from person to person. Retirement, payments for your child’s college education, and a down payment on your home.
Whatever your goals, the key to any long-term investment is understanding your period, or years ago, when you needed money. Long term investment usually means more than 5 years, but there is no clear definition. Understanding when you need money to invest will give you a better understanding of the right investments to choose and how much risk you should take.
For example, Delenda King, CFP of Urban Wealth Management in El Segundo, California, suggests that if you invest college funds in your students’ 18-year-olds, you can take on more risk. ….. “They may be able to invest more aggressively because their portfolios have more time to recover from market volatility,” he said.
3. Choose a strategy and it must be adhered to.
Once you have established your investment goals and duration, choose your investment strategy and stick to it. It may also be useful to divide the entire period into narrower segments to guide asset allocation choices.
Stacy Francis, President and CEO of Francis Financial in New York City, will divide long-term investments into three distinct groups: 5-15 years into the future, 15-30 years into the future, and 30 years or more into the future, based on target dates. .. Francis suggests that the shortest term should be the most conservative investment, with a portfolio of 50% to 60% equities and the remainder bonds. The most aggressive can be 85% to 90% shares.
“It’s nice to have a guideline,” Francis said. “But in reality, you have to do what suits you.” Especially when choosing a comfortable asset portfolio to ensure that you stick to your strategy no matter what. That’s important.
“When the market is down, there’s a lot of fear and anxiety when it comes to portfolio tanks,” Francis said.”But selling in the moment and fixing the loss is the worst thing you can do.”
4. Understand investment risk
Before you buy, make sure you know the risks inherent in investing in various assets to avoid kneeling reactions to a market downturn.
For example, stocks are usually considered a riskier investment than bonds. Therefore, Francis proposes to reduce his share allocation as he approaches his goal. This way, you can fix a portion of your profits when the deadline is reached.
But even in the equity category, some investments are riskier than others. For example, US stocks are considered safer than stocks in developing countries. This is due to the high level of economic and political uncertainty that is usually high in these areas.
Bonds are less risky, but not 100% secure. For example, corporate bonds are as safe as the income of the issuer. If a company goes bankrupt, it may not be able to repay its debts and bondholders will have to bear the losses. To minimize this risk of default, you should still invest in corporate bonds with high credit ratings.
However, assessing risk is not as easy as looking at a credit rating. Investors also need to consider their own risk tolerance, or the magnitude of the risk that could upset them.
5. Diversification is sufficient for a successful long-term investment
By diversifying your portfolio across multiple assets, you can hedge your bets and increase your chances of retaining a winner at any time over a long investment period. “You don’t need more than one investment that is highly correlated and headed in the same direction,” says Schulte.”We want to move our investment in a different direction. This is the definition of diversification.”
Asset allocation can start with a combination of equities and bonds, but with deeper diversification. In the equity section of your portfolio, you can specifically consider the following types of investments:
Large company shares, or large shares, are usually shares of companies with a market capitalization of more than $10 billion.
Medium-sized stocks, or medium-sized stocks, are shares of companies with a market capitalization of $2 billion to $10 billion.
Small cap stocks, or small cap stocks, are shares of companies with a market cap of less than $2 billion.
Growth stocks are company stocks that are experiencing a significant increase in profits or profits.
Value shares are shares that are priced lower than what analysts (or you) have determined to be the true value of the company and are usually reflected in a low price to book value ratio or price to book value ratio.
Stocks can be categorized into any of the above combinations, mix sizes and investment styles. For example, you might own a high-value or low-growth stock. In general, the more combinations of different types of investments, the more likely you are to earn positive long-term returns.
Diversification by investment trusts and ETFs
You can choose to invest in mutual funds rather than individual stocks or bonds to facilitate diversification. Investment Trusts and Exchange Traded Funds (ETFs) make it easy to build a diversified portfolio exposed to hundreds or thousands of individual stocks and bonds.
“To get really broad exposure, you need to own a large number of individual shares. For most individuals, they don’t have to have a large enough amount to do that,” Francis said. “Therefore, one of the best ways to achieve that diversification is to use mutual funds and exchange-traded funds.” Therefore, most professionals, including Warren Buffett, say that the average person We encourage you to invest in index funds that offer low and affordable prices. wide exposure to the stocks of hundreds of companies.
6. Pay attention to investment costs
Investment costs can cut into your profits and cause your losses. When you invest, you usually have two main costs to keep in mind: the ratio of the cost of the funds you invest in and the management fees charged by the advisor. In the past, you had to pay a transaction fee every time you bought an individual stock, ETF, or trust, but this is less common today.
Fund disbursement ratio
For investments in investment trusts and ETFs, you must pay an annual fee ratio. This is an annual fund management fee. This is usually expressed as a percentage of the total assets held by the fund.
Schulte proposes to look for investments with an expense ratio of less than 0.25% per year. For some funds, sales fees (also known as front-end or back-end expenses, depending on whether they are charged at the time of purchase or sale), cancellation fees (if sold before a certain period), or both may be added. If you are considering investing in a low-cost index fund, you can usually avoid these types of fees.
Financial consulting fee
If you are informed about your financial and investment decisions, you may incur more costs. Financial advisors who can provide detailed guidance on various financial matters often charge an annual management fee, which is expressed as a percentage of the value of the assets held. This is usually 1% to 2% per year.
Robo-advisor is the more affordable option, with 0% to 0.25% of assets owned, but the number of services and investment options offered tends to be limited.
Long-term impact of costs
All of these investment costs may seem small independently, but over time they become very complex.