Setting Up Investments For The Long-Term
Investments are a great way to develop your wealth and future-proof your finances. However, do note that investing is a marathon, not a sprint. You need patience, discipline, perseverance, planning, and a steely determination to come out on top.
Regardless, investment objectives and strategies should fit an investor’s circumstance. All too often, overeager investors end up losing much of their investments due to overstretching their means.
Why invest in the long-term?
- Lower risk
Long term investment strategies allow you to potentially ride out market uncertainties and average out your gains over time.
- Smaller time investment
Unlike day trading, you do not need to constantly monitor market conditions. While you do need to take note of what’s going on, you will spend less time on checking on your portfolio and more time on other things.
- Compound interest
Gaining interest on your returns each year is the key to building long term wealth. It is also the primary strategy for long term investing.
With that being said, here are some general guidelines that can help build a long-term investment portfolio without losing all that you put in:
Know your goals
Before taking your first step towards your long-term investment journey, you should take some time to get things into perspective and set out your financial goals. Clear goals will make you less likely to cash out your investments early on impulse, and help you stick to your overall plan.
Goals can be divided into three broad ranges – short, medium, and long. While we use the term “short”, short-term goals are more along the lines of six months to a year. Medium-term goals generally span three to five years in order to accomplish. With long-term goals, you will be looking at a timeline that can last for up to ten years or more.
Some short-term goal examples include buying a new car or paying for student loans. Medium-term goals can include things such as planning for your wedding or saving for your first home. Long-term goals can be something like saving for retirement or paying for your children’s education.
Once you know your goals, you can draw up a rough estimate of how much money you will need to achieve them. This will help you sort out your finances and, more importantly, keep you focused and motivated to save and invest to reach your targets. Remember, evaluate your finances, set your goals, and decide how much is needed to reach said goals.
Form an investment plan
With your timeline and risk tolerance in mind, draft an investment plan. This provides you with an outline for building and monitoring your investment portfolio. Things to consider in your plan include:
- Asset allocation
Asset allocation is an investment strategy that aims to balance risk and reward by distributing a portfolio’s assets according to your goals and risk tolerance. It is essentially the process of deciding where to put money to work in the market. If big losses make you nervous, concentrate on lower-risk options like bonds.
- Investment selection
Choosing different types of investments to diversify your portfolio? Here are some things to consider when choosing what to invest in:
- Know your timeline – Commit to a period of time during which you will leave those investments untouched.
- Compounding – A “snowball effect”. When you start earning money on the money your investments have already earned, you will see exponential growth.
- Refer to history – If you seek higher returns and you can tolerate the higher risk, mostly stocks are the way to go. The fact is, the total return on stocks historically has been much higher than for all other asset classes. If you seek safer investments, look at assets that have historically stable gains.
- Investing strategy
Deciding to be an active or passive investor. Active investing involves buying and selling investments with the goal of earning above-average returns. A passive strategy holds investments in order to build wealth gradually.
It goes without saying that “long-term investment” means that you will be needing a lot of discipline and patience. Therefore, it is vital to start early. Not only does an early start teach you about financial discipline, it will quickly bring about compounding results.
Compounding has a multiplier effect on wealth creation over time, slowly increasing the total money invested in your schemes. Being an early bird gives your money more time to grow and allows you to counter any unforeseen inflation.
Find the right broker
Each and every broker is different. Take some time to ask around and do some research to find a broker that fits your needs. You can either opt for a discount broker which typically offers services online where investors can open accounts and place trades for an affordable fee; or you could go with a full service broker that provides advisory and portfolio management services in exchange for higher commissions.
For those who are keen on a more passive investing strategy, you may want to consider a robo advisor, which provides automated investing services, such as portfolio allocation and rebalancing, based on your preferences. If you want to make more complicated investments, you may want to consider hiring a financial advisor.
Ignore market noise
While long-term investment is a slow and steady game, the investment market itself is fast and full of differing views and opinions, especially when things get a little hectic. Suddenly, you will find that everyone thinks that they are an expert and sharing opinions. For long-term investing, you must ignore noises as they end up as distractions that can impinge on your goals.
It is actually advisable to hire a financial advisor who understands your financial plan, positioning, and goals if you are unsure on how to proceed with your investments. More often than not, constant market noise tends to put pressure on you, making you act on impulse and resulting in poor decisions. Always keep your eye on the bigger picture and set your sights on your goals.
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People are stronger together. The same thing goes for long-term investing. You should not depend on only a single avenue of investment if you want to succeed in the long-run.
Diversify your holdings across different asset classes such as equities, bonds, gold, and also within each asset class. For example, within equities, spread your investments across large-cap, mid-cap, and small-cap funds. Having a diverse portfolio serves to spread your risk out so that not one single disaster will wipe out all your efforts.
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