Taking a long-term approach to investing is a good way for you to try to grow your money, especially if you’re just starting your investing journey from a small initial capital.
This strategy offers a lot of advantages, including more chances for your money to grow. Remember that the longer your money stays in, the more time it has for earning. Going long-term also increases the likelihood that your investment will be able to recover from any market cycles that happen.
If you’re ready to go the distance with your investment, remember these 5 important things:
1. Make sure you won’t be needing the money anytime soon
When going long term, you’ll be keeping the money in for quite a while. That’s why you need to make sure to use only money that you won’t be needing anytime soon.
Constantly pulling out and reinvesting money would be more accurately classified as medium-term or short-term investing, which would have their own set of characteristics and considerations. This could also prove to be costly because of the transaction fees and commissions deducted from your funds.
If your situation makes it difficult to put in a large amount of money when you first make that investment, remember that you can always start small and keep adding to it when you can. In fact, doing this may even be a better strategy, as it allows you to achieve peso-cost averaging.
2. Don’t be afraid to be aggressive at the start
Since long-term investing provides more time for your investment to grow and recover in case of market cycles, you can consider investments that are on the aggressive side. This will allow you to maximize the potential for profit, because of the inverse relationship between risk and return.
Remember though that you should still always follow your risk profile so you don’t end up exposing your money to more risk than you would be comfortable with. This means that being aggressive doesn't necessarily mean investment products that match an aggressive profile.
3. Consider shifting to a more conservative stance as the time horizon approaches
Target date funds, which are created and run with a specific time frame in mind, gradually shift to more-conservative outlets to protect the capital as the target date draws near.
You may want to think of adopting this strategy in your own portfolio, especially if you’ll be using the money for something essential, like retirement. Remember though that you should be factoring this asset reallocation into your plan from the start, because the returns from the more-conservative investments are likely to be smaller than those from the products with more risk.
4. Diversify your portfolio along the way
Diversification will help you manage your risk by spreading it around, so your portfolio optimally should have varied investment vehicles that focus on different industries. This reduces the chances that a negative event (like a sudden dive in real estate) would have a big impact on all your investments.
This is a good strategy no matter how long you plan to stay invested, and it certainly has its benefits when you’re going long term.
5. Hold on during market cycles
When you invest for the long term, you’ll be increasing the chances that your portfolio will have enough time to recover from any market cycles that happen while your money is in it.
That’s why you don’t have to be too alarmed when things go down, as this is pretty much inevitable and unavoidable. As history has shown, the market will eventually go up again, and the value of your investments with it.
While it might be tempting to pull out and reinvest at a later date, remember that this turns your paper loss into an actual loss, and could have a significant impact on your ability to reach your money goal.
If we are going to look back at history, we can ascertain that each major downturn, whether it’s caused by an economic, political or health crisis, is always followed by a long-term major recovery. And if history will keep on repeating itself, the crisis we are in right now could be worth taking advantage of.
