Top 10 Tips for Successful Long-Term Investing

Long-term investing has considerable advantages. It helps lower risk, offers your money more time in the market so it can grow with compounding, and minimizes costs and taxes. Most financial advisors recommend long-term investing. Moreover, not only is it an ideal strategy for new investors, but also for experienced ones. However, long-term investing can be tricky.

Long-term investing requires you to patiently wait for your investments to make money for the most part. Financial discipline and consistency are essential elements of this investment approach. However, most investors find the waiting challenging. Short-term market fluctuations can be worrying for a lot of people. The urge to react to a situation and take action is often discouraged in long-term investing. Having said that, there are some critical moves that may be necessary to ensure long-term gains. Hence, understanding when to react and when to avoid market movements is the key to successful long-term investing.

Making the distinction can be challenging. If you need guidance on how to invest for the long-term, which investments to pick, and how long to stay invested in the market; consult with a professional financial advisor who can advise you on the same.

In this article, we will discuss 10 long-term investing tips that can help secure your financial future:

1. Know your financial goals

The most important of all steps in long-term investing is to know what you are preparing for. Your financial goals can be categorized into short-, medium-, and long-term goals. Long-term investing is effective for long-term goals such as retirement, saving for a child’s higher education, etc. If your goal is to buy a house in the next five years, long-term investing may not be suitable for you. Therefore, taking a look at your goals is critical before you start. This will ensure you pick the right products, align your investments accordingly, and, most importantly, are not tempted to sell your investments mid-way and lose out on the real potential to earn a profit.

Evaluating your goals may also help to assess your risk appetite at different phases of life. For instance, with no kids, debt, or health issues, and a stable job and assured income, you may be able to take on more risk and aggressively save and invest for a house over the next five years. However, without the safety blanket of an assured income and financial liabilities like child’s expenses, debt payments, etc., you may have to extend your investment horizon for the long term. Ultimately, your goals help you decide the correct timeline and ensure there is no confusion or discrepancy along the way.  

2. Start investing early

The benefits of long-term investing can truly be realized if you start early as it removes the burden of saving more money later. Smaller investments made consistently over a long time can be much more beneficial. It can help you balance out your needs, as you do not need to divert all your income into investing. You can instead manage to live a wholesome life, paying attention to your present needs and wants, and concentrate on the future, all at the same time.

For instance, if you earn $50,000 a year and contribute up to 10% of your salary to a 401k retirement account from the age of 30, you would have $717,127 after 35 years. If your employer matches up to 50% of your contribution, you can earn $932,263 in the same time period. This calculation is based on the assumption that your income remains the same for the 35-year period, which is highly unlikely. Therefore, you stand to gain a lot for over a 35-year investment term.

If you start at the age of 40, your investment horizon reduces to 25 years and your total earnings drop to $328,115 from $717,127. Even if your employer contributes 50% of your match, you would only earn $426,549, as opposed to $932,263 if you started at 30. This is the power of long-term investing when started early.  

3. Ignore short-term market volatility

Short-term market fluctuations are part and parcel of investing. They will occur from time to time. However, they should not be feared. Short-term price movements rarely impact your long-term investment yield. When you invest for the long run, you benefit from dollar cost averaging, which averages out the cost of investment over time. This essentially refers to buying more when the market is down and less when the market is high. Over time, the costs are averaged out, and your overall returns are favorable.

Another thing to remember is that market downturns are usually followed by upturns. So, even if your portfolio seems red and the figures go down, they will likely recoup in the future. Short-term fluctuations can induce a lot of fear and panic. But refraining from emotional investing is one of the most critical long-term investing strategies you can adopt.

4. Invest in instruments with a lock-up period/ penalties for early or unqualified withdrawals

Long-term investing requires discipline. If you find it hard to be consistent with your investments or end up liquidating your investments to cover your emerging financial needs, you can invest in instruments with a lock-up period. For example, a hedge fund lock-up is usually between 30 to 90 days. This is relatively short from a long-term investing perspective. However, a 401k and an Individual Retirement Account (IRA) have a lock-up period till the age of 59.5 years. Barring a few qualified expenses, any premature withdrawals from these accounts attract applicable taxes as well as a 10% penalty. If you are tempted to draw money, the penalty can be a deterrent and coerce you from withdrawing your funds.

Additionally, the 529 education plan does not have any age limits for withdrawals. However, the account charges a 10% penalty and applicable tax if the money is used for non-qualified education expenses. These limits impact your overall liquidity. However, they are helpful in ensuring that your money is untouched and can be finally used for the intended purpose. The best course of action here can be to keep a combination of highly liquid instruments like liquid funds, bank accounts, etc., along with other investments. This can help ensure you have money when you need it but are also able to save for the future.

5. Stick to your long-term investing strategies

Another way to amplify the chances of investment success is to stick to your long-term investing strategiesEvery investor has a unique investing style. Some invest in value companies. For instance, Warren Buffett has reportedly followed value-based investing, where he chose stocks of companies with solid earnings and growth potential. This has helped him build the empire he has today. This is not a guaranteed investment approach, and a lot of investors may not prefer it. However, if it aligns with your goals, it may be beneficial to stick to it. Contrarily, if you prefer investing in disruptive companies and startups and have a knack for identifying potential among new, small-cap companies, you may consider it. There are several investment strategies and approaches. However, the key is to determine what works for you and stick to them. Constant experimenting and altering may negate or minimize your gains and lead to loss. It may also add to your stress.


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6. Add more stocks to your portfolio

Stocks are a high-risk, high return asset class. They are the most ideal for long-term investing as the risk involved is lowered over the long investment term. Stocks can be highly volatile in the short term. However, stocks have historically outperformed most asset classes over the long term. For example, S&P 500 gave an average return of 11.82% per year between 1928 and 2021. On the other hand, 10-year Treasury notes only gave a return of 5.11%.

Additionally, stocks can be an effective long-term investment vehicle as they cost less when held for a longer time. Frequent buying and selling increases transaction fees, broker commissions, and trading fees. Moreover, you also spend a lot more time finding the right stocks, monitoring them, and timing the market. This, too, can be time and cost-consuming. However, all of this is reduced over the long term. When you invest in a stock for the long term, you are only required to monitor it periodically as per your convenience.

7. Pay attention to taxes

Long-term investing can be beneficial to save taxes. Capital gains are taxed depending on the holding period. You pay short-term capital gains tax if you hold an investment for less than a year. However, if you hold it for a year or more, you pay long-term capital gains tax. Short-term capital gains are added to your total taxable income for the year and taxed according to the tax slab you fall into. This can range between 10% and 37% for 2023. On the other hand, long-term capital gains follow a different tax slab, as shown below:

Status 0% 15% 20%
Single Taxable income of up to $44,625 $44,625 to $492,300 More than $492,300
Married filing jointly Taxable income of up to $89,250 $89,250 to $553,850 More than $553,850
Married filing separately Taxable income of up to $44,625 $44,625 to $276,900 More than $276,900
Head of household Taxable income of up to $59,750 $59,750 to $523,050 More than $523,050

Long-term capital gains tax rates range from 0% to 20%. Therefore, they can be relatively less and preferable, especially if you fall into a high tax income bracket due to your income. The benefits of long-term investing can be enhanced with tax savings. Make sure to use this to your advantage and plan your redemptions and withdrawals in a manner that your tax liability is minimal.

8. Diversify your investments

Diversification is essential to reduce risk and enhance returns. A long-term investment portfolio must ideally have a combination of multiple asset classes, such as equity, debt, cash, and others. Additionally, you can also diversify per sectors, tax treatments, market capitalizations, geographies, etc. This lowers risk, and the chances of loss as your returns are not dependent on the same factors. For instance, global stocks offer immunity from domestic political or natural events affecting the domestic market. Likewise, small-cap companies may be less prepared to handle extreme market volatility than large-cap companies. If your portfolio has a blend of diverse investments, your money can grow at different paces and save you from severe losses.

9. Know when to sell

While long-term investing is all about buying and holding on to your investments for 20-30 years, sometimes it makes more sense to sell early. Not all investments work in your favor, and it can be better to get rid of them at the right time if they don’t. For instance, if you bought a stock which has consistently shown losses and performed poorly across market situations, you may consider removing it from your portfolio. Investors make mistakes from time to time, and correcting these is essential. However, make sure to sell a stock on the basis of rational thinking and analysis and not panic. If you find it hard to make the distinction, consider hiring a financial advisor.

10. Hire a financial advisor when necessary

Apart from helping you identify poor-performing stocks in your portfolio, financial advisors can also help track your investments and ensure they match your needs. Long-term investing can go on for years. A lot of things can change over time, including your risk appetite, income, goals, and liabilities. Hiring a financial advisor can ensure that these changes are incorporated into your plan as and when required. Financial advisors can also be the voice of reason when markets spiral and investor anxiety is heightened.

To summarize

Long-term investing can benefit several investors as most people lack the time and interest to continually time the market. It can be easier to follow and implement long-term strategies and also lower investment costs and taxes. However, remember to incorporate the long-term investing tips given above to really benefit from it. In most cases, being consistent and starting early can alone help you reach your goals. Having said that, getting help from a financial advisor and including suitable investments in your portfolio from the very start is highly recommended.

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