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Does it seem like everyone wants to offer investing tips these days?
It does to me. So many of these investing tips posts talk about the latest and greatest stock fund or ETF. You won’t find that here.
Instead, you’ll find a process that, when applied consistently, will give you the best chance for long-term investment success.
The operative word in that last sentence is long term. If you’re going to invest in the stock and bond markets, it’s imperative to play the long game.
Otherwise, you’re setting yourself up for failure.
Top 10 Investing Tips for Long-Term Success
Investing is a long-term game. While the tips below won’t tell you exactly which stocks or funds to purchase, they will help inform your overall investment strategy so you can set your investments up for success.
Ready to start investing today? Check out our list of the best online brokers to choose the best broker for you.
1. Define Your Why
To be successful in anything, you have to know why you’re doing it or what your purpose is. If you invest without a clear purpose, you won’t make the right choices.
Why do you want to invest? Is it to save for retirement, buy a house, fund your kids’ college education?
Investing without a goal makes it hard to stay motivated. When the market goes south, you may panic and sell to avoid losing money. If you sell when your investments have dropped, that’s exactly what happens — you lose money. If your investments are tied to a long-term goal, it’s easier to stay the course.
The lesson: Don’t start investing until you know why you’re doing it.
2. Think Long Term
You shouldn’t invest in the capital markets such as stocks, bonds, mutual funds, etc. unless you have a long-term goal like retirement or saving for college. In my experience, these two goals represent most of today’s investments.
If you’re investing in stocks, you should have a 10-year horizon or longer to allow the money to grow. Stocks are volatile, which means they go up and down rather quickly. That makes stocks riskier investments.
If you want to get a higher return, you have to take on more investment risk. The longer you hold the investments, the less risky they are. But the ride won’t be a smooth one. History tells us if you stick with it and stay consistent, you will likely do well. Ten years is the minimum, but the longer, the better.
I’ll let the following chart make the case:
There are lots of jagged marks along the way. If an investor sells at one of those low points, look at the gain they leave on the table. One of the best investing tips any investor can offer is to stay invested for the long term. That offers the best chance for success.
3. Have a Plan
Having a plan goes hand in hand with knowing your why or your purpose.
Let’s take retirement as an example. Ask yourself some questions to help make your plan.
- When do I want to retire?
- How much income do I want in today’s dollars?
- What will my expenses be?
- What sources of income will I have (Social Security, pension, inheritance, etc.)?
- How long will the money need to last or how long do I expect to live?
There are lots of ways to look at this. The FIRE (financial independence, retire early) community uses the 4% rule as the basis to determine how much money you need. The 4% number is the withdrawal percentage studies show is a reasonable rate to maintain principal throughout your lifetime.
For example, if you want to earn $40,000 annually from your investments in retirement, you would need to accumulate $1 million to provide that income ($1,000,000 multiplied by .04 equals $40,000). There are lots of factors to consider. Use the 4% rule as a guideline, not gospel.
The most common way the FIRE community measures this is to take your desired expenses multiplied by 25 to arrive at your retirement accumulation need. The math works out the same in the example above. If your desired income is $50,000, you’d need $1.25 million (25 multiplied by $50,000).
Once you have that number, you can work backward to calculate how much you need to save each year based on a given growth rate. If you have 30 years until retirement, need $1 million, and earn 6% on your investments each year, you’d need to save roughly $12,650 every year.
4. Know Your Options
For most people, mutual funds or ETFs are the best options. Both offer a way to invest in a large number of securities such as stocks and bonds. That helps diversify your investments, which can reduce investment risk and offer the chance to have investments in almost any market around the globe.
Here is a partial list to consider:
- Individual stocks
- Individual bonds
- Mutual funds
- Exchange-traded funds (ETFs)
- Certificates of deposit (CDs)
- Hedge funds
- Private equity
Individual stocks are one of the riskiest investments. Most people would do well to avoid them.
5. Buy What You Understand
Warren Buffett, one of the most successful investors in the world, says that all investors should stick to what they know. He calls it their “circle of competence.”
If you don’t fully understand what a company does, how it makes money, or the market it’s in, then it’s probably not a wise investment.
Likewise, any investment you choose should fit into your plan. If it doesn’t move you closer to your goal, or if you’re not comfortable with the level of risk, walk away.
6. Get Help or DIY
Even after reading a few articles on the best investing tips for new investors, you may not be comfortable or confident to do this kind of planning and investment on your own. If that’s the case, find a fiduciary advisor to help you.
There are plenty of resources available to teach you about investing. If you want to be a DIY investor, be an educated one. You won’t have all the answers. You will, however, be able to learn enough to get started.
The simplest way to do that is with index funds, and the most recognized index is probably the S&P 500. This index includes the 500 largest publicly traded stocks in the U.S. market.
The amount of each stock owned is equal to its percentage of the total value of all the stocks in the index. If a single stock makes up 5% of the total market value of the index, the fund will have 5% invested in that stock. Each stock’s percentage is measured the same way.
Index funds offer investors a way to invest in many areas and they also offer diversification and a lower cost than most other options.
7. Control Costs
Investment costs can hurt your returns. Fortunately, it’s one of the few things investors can control. Investing in low-cost index funds such as mutual funds or ETFs is the best way to keep costs low.
Index funds are passive investment funds. They do not pay large sums of money to fund managers to decide which stocks to buy, when to buy them, and when to sell them. They simply invest in all the stock in the entire index. The only change in the stocks comes once a year when the index is reconstituted.
Each year the index team look at the criteria for being in the index (i.e. the largest 500 companies) and adjust the index to include those companies. They don’t buy and sell stocks at any other time during the year though some exceptions may apply.
There are minimal trading costs and no management fees. Many index fund total expenses are less than 0.10%.
8. Monitor Your Progress
Looking at investment returns is important only as it relates to getting the return necessary to achieve your goals. If you’re investing in low-cost index funds, you’re getting market returns minus costs. You won’t need to switch to a “better” fund to increase returns.
Rebalancing once a year keeps the portfolio in line with your investment goals. Rebalancing means selling those funds that have increased higher than the amount your plan says you should have in them. With the proceeds of those sales, you invest in other funds that have fallen below the recommended levels.
It’s one way to take advantage of buying low and selling high. Rebalancing helps manage investment risk and keep the portfolio invested the way your plan sets.
9. Be Flexible
Investment and financial planning are not onetime events.
Life happens. Health issues, divorce, and job changes may cause you to adjust your plans. Don’t panic and make drastic changes. An annual checkup offers the opportunity to make any changes necessary.
10. Continue Learning
Whether you’re a DIY investor or rely on an advisor, educating yourself about the markets, investing, and retirement planning will help you make better decisions.
There is no shortage of noise in the 24-hour news cycle of today. The noise comes from a lot of different places in a lot of different ways. Whether it’s cable news, financial media, investment companies, brokers, friends, or any other source, it’s hard to know what’s real.
Learn as much as you can to shield your investments against bad information and decisions.
A Final Investing Tip: Be Patient
Investing is simple but not necessarily easy. It takes discipline to develop and stick with a plan. Knowing your goals and why you want to invest makes it much easier to stay the course.
Watching your portfolio every day, week, or month can cause anxiety and fear. Instead of tracking your investments so closely, map out your plan from the beginning and stay consistent. Educate yourself, stick to what you know, and remember that investing is a long-term game.
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