5 Long-Term Investment Strategies from a Master

investment strategies

When many of us think of investing, movies such as “The Wolf of Wall Street” and “Boiler Room” spring to mind, with their high-stakes, short-term trading and the potential for dramatic gains or devastating losses in a matter of seconds.

The real world of long-term investment strategies, though, looks nothing like the goings-on portrayed by Hollywood.

“Too many people think of investing in terms of individual stock picking and short-term trading,” said Tom Drake, a financial analyst, long-time index fund investor, and founder of Maple Money. “Instead of falling for the hype, most regular folks are better off with a long-term investing strategy.”

Here are Drake’s tips for finding long-term success through investing:

1. Start with mutual funds

One of the best ways to capture long-term investment gains is through mutual fund investing. Mutual funds — baskets of stocks or other assets which investors can buy into and share in the profits — offer access to a vast portion of the market. “You don’t have to worry about choosing the ‘right’ stock,” said Drake. “Instead, you benefit from the overall performance of a group of stocks.”

Drake prefers index mutual funds because it’s possible to make one investment that tracks an even larger portion of the market. Plus, index funds are often cheaper than managed mutual funds. “An all-market index fund in the United States allows you take advantage of the total market performance. In any given period of 20 years, the U.S. stock market, as a whole, has never lost,” he said.

Another option is to invest in index exchange-traded funds (ETFs). ETFs are similar to mutual funds, but you can trade them like stocks. They are easy to invest in, and also very inexpensive.

Indexing is one of the best long-term investment strategies, according to Drake, because it only requires that you invest in a few funds to create your desired asset allocation. Then you can sit back and wait for market gains to help you build wealth over time.

2. Use consistent dollar-cost averaging

With dollar-cost averaging, you invest the same amount of money each month. For example, if an index fund costs $50 per share, and you have committed $300 a month to long-term investments, you can buy six shares. Then, as the price rises or falls in the following months, your $300 will either buy more or fewer shares.

Over time, the stock market as a whole should trend higher, Drake said. If you consistently buy shares now, there is a good chance that they will be worth significantly more later as the gains build on themselves.

“Dollar-cost averaging is great, especially for those who have limited resources,” Drake continued. “If you have as little as $25 a month to invest, you can start dollar-cost averaging.” He suggested increasing your contributions as you can, though, since $25 a month won’t result in enough money for you to retire in a couple of decades.

3. Stay the course

When a market event wipes out half your portfolio’s value, it’s tempting to sell stocks and keep the money in cash.

This, however, is exactly what Drake warns long-term investors against doing. “You don’t want to lock in those losses,” he said. “Long-term investment strategies are about sticking to your plan over time. The market recovers — and so will your portfolio.”

When you use mutual funds to invest (especially index funds), you capture market performance. However, until you sell your shares at a price, your losses or gains are all on paper. Selling when the market is down is a good way to see real carnage in your portfolio.

Instead, the long-term investor rides out those losses and rebalances later, when it makes more sense. Drake even buys more shares of his preferred funds when markets head lower. “If I have some extra money, I invest it while prices are low. I get more bang for my buck,” he said.

4. Rebalance carefully

At some point, even long-term investors need to switch around their portfolios. Drake uses the principles of Modern Portfolio Theory (MPT) to rebalance his investments. Under MPT, you gradually change the makeup of your portfolio so you have fewer stocks and more bonds as you approach retirement.

Highly-rated bonds are generally considered safer than stocks — the interest earned more predictable. However, the potential returns are usually lower. Moving to investments with fixed rates as you approach retirement or other long-term goals can improve the predictability of your income.

“Base your rebalancing on your long-term investment plan,” Drake suggested. “Pay attention to when you’re approaching a new milestone. When it’s time to sell five percent of your stocks, use the proceeds to purchase bonds or whatever other asset is in your plan.”

It’s vital to keep your investing plan in mind and make moves according to the plan. Drake said it takes some of the emotion out of investing and keeps you from radically upsetting your portfolio’s makeup on a whim.

5. Avoid frequent trading

Every year since 1994, DALBAR, Inc., a financial services market research firm, analyzes market and investor performance. And every year the findings are the same: “Mutual fund investors who hold on to their investments are more successful than those who try to time the market.”

Drake agreed. “Frequent trading results in more fees, which eat into real returns,” he said. “Plus, there’s a better chance that you’ll miss out on gains and lock in losses when you trade frequently and try to time the market.”

Instead, Drake recommended setting up an automatic investing plan with the broker of your choice and buying shares of funds that help you meet your long-term investment goals once a month. “It’ll cost you a lot less, save you a world of stress, and your portfolio will perform better over time.”

Investment strategies that work for regular people

Drake said these investment strategies are best for “regular” folks who don’t have tens of thousands of dollars to invest immediately. It’s about using the time to your best advantage. By taking the long view and avoiding the traps of short-term trading (and thinking), it’s possible to build a decent-sized nest egg.

Some investors do well with day trading and using other short-term strategies. However, some of the techniques are advanced and require constant monitoring of the market. It can be time-intensive and require extra research.

Drake suggested starting with simpler long-term strategies and only moving to shorter-term efforts after study.

Consider beginning your investing today with Drake’s tips in mind. Even if you don’t have a lot of money, you can get a good start on your financial future.

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