With defined benefits systems being phased out across the developed world, individual wealth building on a robust long-term investing strategy has become an imperative for all but the ultra-wealthy.
Especially younger generations will have to provide for themselves a great deal more than their parents, many of which benefit from generous pensions and decades of wealth creation through real estate. Financial markets’ long-standing track record of wealth creation makes investing the best means for private investors to reach financial independence, second only to a good education.
Yet, putting together a sound long-term investing strategy and navigating the world of investments can seem daunting. That said, investing is not rocket science. As this article explains, there are certain key concepts and notions that must be learned. Yet, they can be easily grasped by pretty much anyone with a decent level of education.
Investors who understand the tenets of long-term investing are bound to make good decisions and will weather market downturns with serenity. In this article, we have compiled ten key principles that, if properly followed, provide a strong foundation for long-term investing success.
1. Continuity and commitment
One of the most impactful factors in long-term investing is continuity and commitment. When you invest consistently, you set in motion a snowball effect where your investments grow exponentially over time, largely due to reinvesting ever higher amounts thanks to previous returns.
Any time is a good time to start investing. The earlier you can start, the better the outcome is likely to be. Time is an investor’s best ally. The longer your investment period, the more you benefit from the power of compound interest. Continuous investing and re-investing, especially in times of high interest rates constitutes the backbone of a successful long-term investing strategy.
A portfolio tracker can be a powerful ally on your long-term investing journey. There are various great free portfolio trackers out there. They benefit private, self-directed investors in several ways. First of all, a free portfolio tracker helps you stay in control of your investments through valuable insights and analytics. Secondly, an investment tracker helps you monitor your investments in a reliable and efficient manner. Ziggma’s Smart Alerts are one example. Third, the best free portfolio trackers will even provide you with tools that will enable you to make your portfolio better by pointing out weak spots and areas of improvement.
2. Diversify your investments
Diversification, often touted as the only “free lunch” in investing, means spreading your investments across asset classes, industries and companies to mitigate risk. No single investment comes with a guarantee, and by diversifying, you ensure that the underperformance of one asset won’t severely impact your entire portfolio. A well-diversified portfolio is essential for long-term investing success.
A free portfolio tracker can actually make it very easy to monitor how well your investments are distributed to ensure that you’re not overly reliant on a particular sector or stock. Modern, well-designed portfolio tracker and analysis tools will greatly facilitate the construction and maintenance of a robust well-diversified investment portfolio. They may just allow you to replace your old mutual fund investments through a self-managed portfolio. Chances are that with a sound long-term investing strategy you can create more value on your own, given that mutual funds can set you back by up to 1.5% of total assets per year.
3. Monitoring your investments throughout your long-term investing journey
Long-term investing doesn’t mean “set it and forget it.” In fact, regularly reviewing and adjusting your portfolio is crucial. These are some of the key portfolio parameters you will want to monitor over time.
Investment portfolio quality
Naturally, you want to make sure your portfolio quality does not deteriorate. If you are a stock investor, some of your stocks, or rather the underlying companies, will be outdone by competitors. These will in turn have better prospects of value creation for investors. When this type of situation occurs, you want to switch out your holding for a better performing peer.
As mentioned above, maintaining a well-diversified portfolio is the foundation for sustainable wealth building. No single company or even asset class should make up too large a share of your total wealth. Proper monitoring of portfolio diversification should be the top priority for any investor.
By monitoring portfolio risk you ensure that your portfolio risk profile remains within your risk tolerance. Regular monitoring can detect potential threats or imbalances, allowing for timely adjustments to mitigate losses or capitalize on new opportunities. Proper portfolio risk monitoring represents your number one safeguard against major setbacks during market downturns.
Brokers have historically provided very little in terms of tools to help private investors manage and track their portfolios through time. Open banking changes the game. It means that you own your financial data and that you have the right to make this data available, in a secure fashion to third party service providers, who just may do a much better job at helping you build wealth during your long-term investing journey.
Investment portfolio income
If you are relying on recurring income from your investments, you will want to closely track and analyze your cashflow from investments. These are some key considerations for the monitoring of investment portfolio income. Which asset pays how you when, how much and what kind of yield? Are your portfolio companies increasing dividend payouts year after year? When do payout hit? Are they aligned with my expenses? A good investment tracker should be able to provide you with all the answers.
4. Minimize fees
Over a lifetime of long-term investing, fees can be the silent killers of return. Some mutual funds will set you back by as much as 1.5% per annum. Even small percentages, when compounded over years, can consume a significant chunk of your potential earnings. Long-term investors must be keenly aware of management fees, transaction fees, and other associated costs. ETFs are often cited as a low-cost option. In reality, only the largest, broad-market ETFs are truly inexpensive. If you are ok owning the entire market, then these are a great option. However, if you are not so enthused about many of the industries and stocks that you will own with broad market ETFs, think banks, utilities, oil and tobacco stocks, then you would be looking at specialty ETFs whose expense ratios are often closer to 0.5-1%.
There’s no better way to minimize fees than DIY investing. Over the long-term your savings are bound to add up to a considerable, performance-boosting amount. In fact, the average mutual fund expense rate of 0.59% (Source: Morningstar) will set you back by 11% after 20 years and a whopping 21% after forty years, assuming you can earn the historical market return of stocks of 8% per annum over 40 years. In absolute terms, a starting balance of $100,000 will turn into $2.17 million absent asset management fees and just $1.71 million when incurring a fee of 0.59% on total invested assets each year.
5. Never panic
Every investor, at some point in their long-term investing journey, will face a market downturn. These are the moments when emotions run high, and decisions are often clouded by fear. But history shows that panic selling often results in missed opportunities. Markets have a cyclical nature, and downturns are followed by recoveries. Having a steady hand and staying committed to your strategy is vital. There are multitude of specific reasons why it is very unwise to panic.
First, staying invested gives you the opportunity to reinvest dividends, which can boost your returns over time. If you’re out of the market, you miss out on these dividends and the compounding they can offer.
Secondly, by investing a fixed amount regularly, regardless of market conditions, you can take advantage of dollar-cost averaging. This means you buy more shares when prices are low and fewer shares when prices are high, thereby lowering the average cost per share over time.
Third, frequently moving in and out of the market can result in higher transaction fees and potential tax implications, diminishing your overall returns. At times you can even get paid handsomely while waiting for the market to turn.
Though often overlooked, the tax implications of your investments can significantly impact your long-term investing returns. Different investment types come with varying tax treatments. Certain nuances can make for more tax-efficient decisions, maximizing post-tax returns.
Another important consideration is tax harvesting, often referred to as “tax-loss harvesting.” It’s a strategy employed to minimize capital gains taxes. By selling investments that have experienced a loss and simultaneously reinvesting in similar assets, investors can offset gains with those losses. This approach not only reduces an investor’s current tax liability but can also enhance after-tax returns. Over time, consistent tax harvesting can lead to significant tax savings and wealth accumulation.
7. Do Your Homework: Identify best-in-class stocks
Even with your long-term investing hat firmly put on, the allure of “hot stocks” can be tempting. As you can expect, empirical evidence shows that it’s long-term fundamental business performance that drives sustainable value creation.
Investing in well-managed companies with strong fundamentals, clear business models, and growth potential is pivotal. Making sense of companies many key performance indicators, especially when comparing against multiple peers, can be cumbersome and often overwhelming, even for industry professionals. Stock scoring or ratings, powered by technology-enabled, fundamental analysis represent a great aid to many private investors. These scores capture dozens of financial ratios crunching millions of time series data points, so you don’t have to.
Eventually, you will have built a stock portfolio comprising a selection of the best stocks from different industries. Once the stocks are in your portfolio, you want to make sure their underlying fundamentals keep going strong. For example, you want your portfolio companies’ growth to increase and profitability levels to rise.
Some of the best free stock portfolio trackers can assist with this type of monitoring. For example, Ziggma’s portfolio tracker lets you track these KPI over time versus at the time of purchase. As all professional investors routinely do, private investors should also doublecheck from time to time whether their holdings’ key performance indicators are improving relative to when the stock was purchased.
8. Pick a great platform
The choice of your investment platform plays a significant role for the proper implementation of your long-term investing strategy. In the US, most brokers are well-capitalized and closely regulated so that your funds are safe. That said, brokers make money when you transact or when you have cash sitting idle in your account where it gets remunerated a rates well below market rates.
Both cases comprise a non-negligible conflict of interest. Your broker has an interest in getting you to trade, even if there may be little reason for action on your part. As for the cash, when market interest rates are high, you will certainly be better of investing your cash in an expensive bond ETF.
Thanks to open banking, innovative solutions, free of conflict of interest, are emerging in the marketplace. Portfolio trackers are one example. Since these app often times are considerably more user-centric and modern than brokers’ legacy systems, many investors have started to manage their investments through these platforms rather than at their broker. In such cases, the broker’s role is reduced to order execution and compliance with the decision-making originating at the investor’s preferred portfolio tracker app.
Whether it’s user interfaces, educational resources, or customer support, make sure that the platform you end up choosing suits your needs to best serve you on your long-term investing journey.
9. Understanding the cycle
Every market, no matter how robust, goes through cycles. Recognizing and understanding these cycles is a major asset for your long-term investing success. It helps you make the right decisions during downturns and capitalize on emerging opportunities.
As we explain in our article “Four Options to Successfully Manage Your Portfolio in an Expensive Stock Market”, there are a few easy-to-grasp market valuation methods that every investor should grasp and have on their radar. One example is the Equity Risk Premium. It reflects the return or earnings yield (the inverse of the P/E ratio, i.e. net profit divided by market capitalization or earnings per share divided by the stock price) offered by the equities market over and above the risk-free rate of return.
10. Invest Your Cash for Compound Interest
Albert Einstein once said, “Compound interest is the eighth wonder of the world.” When you reinvest the returns from an investment, it earns further returns, leading to exponential growth over time. This principle can significantly magnify your earnings over your long-term investing period. A free portfolio tracker can help you monitor and maximize these compounding benefits, ensuring your money is always working optimally.
A sound long-term investing strategy offers a pathway to substantial value creation. By adhering to these ten principles and leveraging investment management tools such as a free portfolio tracker, you can navigate the investment world with serenity and confidence. Remember, investing is a long journey. Going on this journey equipped with the right knowledge and tools will make all the difference.