What are 10 tips for successful long-term investing?
While the stock market is riddled with uncertainty, some proven principles can help investors improve their chances of long-term success.
Some investors take profits by selling valuable investments while holding on to underperforming stocks that they hope will rebound. But good stocks can rise further, while bad stocks risk going to zero.
Key Findings
- The stock market is full of uncertainty, but certain proven principles can help investors improve their chances of long-term success.
- Some of the most important basic investing tips include riding the winners and selling the losers; avoid the desire to chase “hot advice”; resist the temptation of cheap stocks; and choose a strategy and then stick to it.
- If your time horizon allows it, focusing on the future with an eye toward long-term investing can maximize returns for almost any investor.
Understanding successful long-term investing
Ride the winner
Peter Lynch famously spoke of “tenfolds” – investments that have increased in value tenfold. He attributed his success to the small number of these stocks in his portfolio.
But this required the discipline to hold on to a stock even after it had risen many times over if he believed there was still significant upside potential. The takeaway: Avoid getting caught up in arbitrary rules and consider stocks on their own merits.
Sell the loser
There is no guarantee that stocks will recover after a long decline, and it is important to be realistic about the prospects for underperforming investments. And while admitting to a stock loss can psychologically signal failure, there's no shame in admitting mistakes and selling off investments to prevent further losses.
In both scenarios, it is important to evaluate companies on their merits to determine whether the price justifies the future potential.
Don't worry about little things
Instead of panicking about short-term investment movements, it is better to monitor their overall trajectory. Be confident in the broader investment history and don't be swayed by short-term volatility.
Don't overestimate the difference of a few cents you can save by using a limit order and a market order. Of course, active traders use minute-by-minute fluctuations to lock in profits. But long-term investors do well with periods of 20 years or more.
Don't look for hot advice
Regardless of the source, never accept stock tips as valid. Always do your own analysis of a company before investing your hard earned money.
Tips sometimes work, depending on the reliability of the source, but long-term success requires deep research.
Choose a strategy and stick to it
There are many ways to pick stocks, and it's important to stick to a consistent philosophy. Fluctuating between different approaches effectively turns you into a market timer, which is dangerous territory.
Remember how famous investor Warren Buffett stuck to his value-focused strategy and avoided the dot-com boom of the late 90s, thereby avoiding major losses when tech startups failed.
Don't overestimate the P/E ratio
Investors often place a lot of importance on the price/earnings ratio, but paying too much attention to any one metric is reckless. P/E ratios are best used in conjunction with other analytical processes.
Thus, a low P/E ratio does not necessarily mean that the security is undervalued, and a high P/E ratio does not necessarily mean that the company is overvalued.
Focus on the future and maintain a long-term perspective
Investing requires making informed decisions based on things that have not yet happened. Past data may indicate the future, but this is never guaranteed.
In his 1989 book, Alone on Wall Street, Peter Lynch stated, “If I had bothered to ask myself, 'How can this stock go higher?' I would never buy a Subaru when the price has already increased twenty times. But I checked the fundamentals, realized that Subaru was still cheap, bought shares and then made a sevenfold profit.” It is important to invest based on future potential and past performance.
While big short-term gains can often tempt market newcomers, long-term investing is essential for greater success. While active short-term trading can be profitable, it involves more risk than buy-and-hold strategies.
Be open-minded
Many great companies are household names, but many good investments lack brand recognition. Moreover, thousands of small companies have the potential to become the blue chips of tomorrow. In fact, small-cap stocks have historically outperformed their large-cap counterparts.
From 1926 to 2017, U.S. small-cap stocks returned an average of 12.1%, while the Standard & Poor's 500 Index (S&P 500) returned 10.2%.
This doesn't mean you should dedicate your entire portfolio to small-cap stocks. But there are many great companies beyond those in the Dow Jones Industrial Average (DJIA).
Don't be tempted by cheap stocks
Some people mistakenly believe that they have less to lose with cheap stocks. But whether the $5 stock falls to $0 or the $75 stock does the same, you'll lose 100% of your initial investment, so both stocks carry the same downside risk.
In fact, cheap stocks are likely riskier than more expensive stocks because they tend to be less regulated and often exhibit much greater volatility.
Care about taxes, but don't worry
By putting taxes above all else, investors can make poor decisions. While tax implications are important, they are secondary to investing and growing your money safely.
While you should strive to minimize your tax liability, the main goal is to achieve high returns.
