Long-term investing is a strategy that has benefits, including compound interest, tax advantages, and cost savings. Read on to learn some tips that can be used for long-term goals, such as retirement.
Investment objectives and strategies should fit an investor's circ*mstance. However, here are some general guidelines that can help build a long-term investment portfolio.
1. Identify Goals, Time Horizon & Risk Tolerance
Investment selection will be guided by long-term financial goals such as education savings or retirement. Goals will be further defined by one's time horizon or the length of time one intends to keep their money invested.
Time horizon also determines one's risk tolerance or their level of comfort with fluctuations in the value of their account. For example, an aggressive portfolio of growth stocks can be appropriate for an investor with a long-term time horizon of 20 years, if the investor is comfortable with short-term market fluctuations.
2. Create an Investment Plan
Guided by an investor's time horizon and risk tolerance, an investment plan provides an outline for building and monitoring an investment portfolio. Also known as an investment policy statement, or IPS, the investment plan may provide guidelines used to select, monitor, and replace investments in the portfolio.
Items that may be included in an investment plan are:
Asset allocation: This is the percentage weight of assets to be held in the portfolio. For example, a long-term investor with a moderate tolerance for risk might choose an asset allocation of 70% stocks and 30% bonds, or 60% stocks and 40% bonds. A risk averse investor might only allocate 10% of their portfolio to stocks.
Investment selection: Choosing specific investments for a portfolio is the foundation of diversification, which involves spreading money among multiple investments.
Investing strategy: An investor may want to choose between active or passive investing strategies. Active investing involves buying and selling investments with the goal of earning above-average returns. A passive strategy holds investments such as index funds or target-date funds to match market returns.
3. Choose a Brokerage
Select a brokerage firm, such as a discount brokerage company or a full service broker. A discount broker typically offers services online, where investors can open accounts and place trades for an affordable fee. Full service brokers provide advisory and portfolio management services, but charge higher commissions.
Tip: Those who choose a passive investing strategy may want to consider a robo advisor, which provides automated investing services, such as portfolio allocation and rebalancing, based upon an investor's preferences. Those with complex financial needs may want to consider hiring a financial advisor.
4. Choose Investment Account Type
Choose an investment account type, such as a standard brokerage account or a retirement account like an IRA. Many individuals may be offered an employer-sponsored retirement plan, such as a 401k, which can be valuable for long-term investing.
Tip: It's generally wise to take full advantage of 401k matching contributions. For example, if an employer offers a 50% match up to 6% of employee contributions, the employee should make their best effort to contribute at least 6% of their pay to the 401k plan before making contributions to other investment accounts.
5. Research and Select Types of Investments
With the planning finished and investment accounts open, research and select the types of investments that best fit investment objectives and tolerance for risk.
Mainstream investment types are:
Stocks
Bonds
ETFs
Mutual funds
Index funds
REITs
Term Deposits / Guaranteed Investment Certificates
6. Implement the Plan
Plan implementation is the process of putting together all of the investment planning elements, including the purchase of investments. Some investors may want to establish a systematic investment plan, which automates periodic contributions from a bank account linked to the investment account.
7. Monitor Portfolio Risk & Health
Portfolio management is an ongoing process, which requires a periodic portfolio health and risk check to ensure that the portfolio continues to meet the investor's objectives and risk attributes.
The monitoring process for a long-term investor may also include portfolio rebalancing, which involves periodically adjusting one's portfolio to match the original asset allocation plan.
Bottom Line
Long-term investing generally refers to investment goals and strategies with time horizons of more than 10 years. This extended timeframe generally allows long-term investors to be as aggressive as their risk tolerance allows.
Analyst’s Disclosure:I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
Dollar-cost averaging is particularly useful in a long-term investment strategy. When you invest in something when its price is down, you get more units of the investment for your money, which can lower your average cost per unit. And the lower your cost to invest, the greater your potential return.
Dollar-cost averaging is particularly useful in a long-term investment strategy. When you invest in something when its price is down, you get more units of the investment for your money, which can lower your average cost per unit. And the lower your cost to invest, the greater your potential return.
Investing $1,000 a month for 20 years would leave you with around $687,306. The specific amount you end up with depends on your returns -- the S&P 500 has averaged 10% returns over the last 50 years. The more you invest (and the earlier), the more you can take advantage of compound growth.
What Is a 70/30 Portfolio? A 70/30 portfolio is an investment portfolio where 70% of investment capital is allocated to stocks and 30% to fixed-income securities, primarily bonds.
Earning $2,000 in monthly passive income sounds unbelievable but is achievable through dividend investing. However, the investment amount required to produce the desired income is considerable. To make $2,000 in dividend income, the investment amount and rate of return must be $400,000 and 6%, respectively.
Answer and Explanation: The amount of $100,000 will grow to $432,194.24 after 30 years at a 5% annual return. The amount of $100,000 will grow to $1,006,265.69 after 30 years at an 8% annual return.
Over the past decade, you would have done even better, as the S&P 500 posted an average annual return of a whopping 12.68%. Here's how much your account balance would be now if you were invested over the past 10 years: $1,000 would grow to $3,300. $5,000 would grow to $16,498.
“The first rule of investment is don't lose. The second rule of investment is don't forget the first rule.” Buffett famously said the above in a television interview.
While it provides a general guideline, it's not a guaranteed predictor due to factors like market volatility and inflation. The 10-5-3 rule is a general guideline for investing, suggesting an allocation of 10% of your portfolio in cash, 5% in bonds, and 3% in commodities.
This rule of thumb says investors should have saved 25 times their planned annual expenses by the time they retire, according to brokerage Charles Schwab.
There are two approaches you could take. The first is increasing the amount you invest monthly. Bumping up your monthly contributions to $200 would put you over the $1 million mark. The other option would be to try to exceed a 7% annual return with your investments.
Making $4,000 a month based on your investments alone is not a small feat. For example, if you have an investment or combination of investments with a 9.5% yield, you would have to invest $500,000 or more potentially. This is a high amount, but could almost guarantee you a $4,000 monthly dividend income.
Doubling money would require investment into individual stocks, options, cryptocurrency, or high-risk projects. Individual stock investments carry greater risk than diversification over a basket of stocks such as a sector or an index fund.
To sum it all up: Know what you're investing for, know the limits of your financial comfort zone, spread your financial prospects into different baskets, question your investment ideas and approaches every now and then, and don't let fluctuations distract you from your long-term investing goals.
Fundamental analysis is most often used when determining the quality of long-term investments in a wide array of securities and markets, while technical analysis is used more in the review of short-term investment decisions such as the active trading of stocks.
There are different strategies for long-term investing. The buy and hold technique refers to buying stock and holding on to it for an extended period in the hope of riding through the lows in the market and profiting from the general upward trend of the market over a long period of time.
Introduction: My name is Stevie Stamm, I am a colorful, sparkling, splendid, vast, open, hilarious, tender person who loves writing and wants to share my knowledge and understanding with you.
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