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Investing can be the key to building wealth over the long term — as long as you employ the right strategies.
The financial markets can be volatile, and investors are often tempted to react to those extreme price movements. The last two years are an example of that volatility: 2022 brought heavy losses, 2023 followed with gains and 2024 has seen the stock market hit new record highs. While the losses were balanced out by positive performance, that rollercoaster-like behavior was enough to make any investor nervous about the future of their money. That is why financial advisors tend to recommend focusing on long-term investing, and trusting that keeping your assets invested in the market is a better strategy than trying to time the market’s ups and downs.
Whether you’re a new or experienced investor, here are five tips for long-term investing.
Tips for Long-Term Investing
The best investing strategy for one person may not be the best for another. But overall, the following tips are helpful when investing for the long term.
1. Set Goals
Before you begin investing, it’s important to first consider your objectives. Perhaps you want to save for a future down payment or a child’s college tuition, or help ensure you’ll have enough money when you retire.
Whatever the reason — and there are likely several — identifying a goal helps you determine your time horizon and risk tolerance.
“Establishing clear, measurable goals is the first step in any long-term investment strategy,” says financial planner Jason Ball. “Whether saving for retirement, a child’s education or a major purchase, defining your objectives helps tailor your investment plan and maintain focus.”
The money you invest for goals that are at least five years out, for example, may be able to take on more risk since you have the time to recover from market downturns. For those goals, you may opt for investing in stocks. But near-term goals like buying a new car within two years or building an emergency fund of three to six months worth of expenses likely require more conservative investment and savings vehicles, like certificates of deposit and money market accounts.
2. Do Your Research
You should always do your research so you are well-prepared to begin investing in the best financial assets for your needs. You may want to opt for index funds from trusted providers like Fidelity Investments and Charles Schwab, which allow you to avoid choosing individual assets — a practice that comes with added risk.
“Educate yourself on different investment options, market conditions and economic indicators,” Ball says. “This knowledge allows you to make informed decisions and choose investments that align with your risk tolerance and financial goals.”
A registered financial advisor can provide critical information and key recommendations based on your personal situation.
If you opt to choose your own individual securities, take the time to review a company’s financial records, including its revenue and net income. A great place to start is the Electronic Data Gathering, Analysis and Retrieval (EDGAR) site by the Securities and Exchange Commission (SEC), which provides a database where you can search for all types of information, including a company’s Form 10K for annual financial statements and its Form 10-Q for quarterly updates.
3. Diversify
A crucial part of investing for the long term is diversifying your investments, which involves spreading out your money across multiple asset classes in order to minimize risk. This strategy helps ensure that you do not risk losing all of your money if one investment does not perform well (as the saying goes, don’t put all your eggs in one basket).
It is often best to consider a mix of different asset classes, like cash, stocks and bonds. You should also invest in a mix within those asset classes, like large-cap, mid-cap and international stocks.
4. Stay the Course
When the market dips, it may be tempting to pull your money from the market — but that can severely hurt your portfolio.
Timing the market (as in, buying when prices are low and selling when they’re high) is difficult to do, even for professionals on Wall Street. Attempting to do so can result in losses or missing out on the market’s highs.
What should long-term investors do instead? Many financial advisors recommend dollar-cost averaging, a strategy that involves making regular investments with a set amount, such as investing $100 every month. Over time, dollar-cost averaging should smooth out your investing, because you’ll be buying at market highs and lows. The stock market has historically seen an average annualized return of around 10%, so this steady approach allows you to avoid acting on short-term fluctuations while gradually building wealth.
“Long-term investing requires patience and discipline,” Ball says. “Market fluctuations are inevitable, but reacting impulsively to short-term market movements can derail your investment strategy. Stick to your plan and make adjustments only when necessary, based on your goals and life changes.”
5. Track Progress
While it’s best to avoid making changes to your portfolio in reaction to market fluctuations, you do want to regularly check in on your investing plan and make sure it still aligns with your goals, time horizon and risk tolerance. As you near retirement, for example, you will likely want to shift some of your portfolio from more-risky assets like stocks to less-risky assets like bonds. It’s also important to regularly rebalance, which involves buying and selling stocks to maintain your ideal asset allocation.
You may also need to change the amount you are investing. For example, if you get a new job with a salary bump, you’ll want to consider investing more. If you just had a child and want to increase your emergency fund, you may want to designate some of your income to a safer vehicle, such as a high-yield savings account.
An annual review can help you adjust your portfolio to embrace major life changes so that your investment strategy is always appropriate for your life as it is today.
The Bottom Line
It’s normal to feel anxious when the financial markets are volatile, and it can be tempting to act on that anxiety by buying or selling investments. But investing for the long term by implementing strategies like diversification, rebalancing and dollar-cost averaging is the more reliable way to build wealth for the long term.
Sources
U.S. Securities and Exchange Commission. (2024, April 29). EDGAR – Search and Access. Retrieved from https://www.sec.gov/edgar/search-and-access.
Office of Investor Education and Advocacy, U.S. Securities and Exchange Commission. (2024, April 29). Investor Bulletin: How to Read a 10-K.
U.S. Securities and Exchange Commission. (2024, April 29). How to Read a 10-K/10-Q. Retrieved from https://www.sec.gov/oiea/investor-alerts-and-bulletins/how-read-10-k10-q.
