Investing Basics: 7 Strategies for Successful Long-Term Investment
The key to successful investing isn’t predicting the future, it’s learning from the past and understanding the present. We present seven time-tested strategies for guiding portfolios towards tomorrow’s goals.
1 Plan on Living a Long Time – and Saving More for it
- People who are 65 today have a good chance of living to 80 or 90. But studies reveal many of us have not saved enough for our retirement years.
- Investors should start early, invest with discipline and have a plan for their future
- There is a 52% chance of one member of a 65-year old couple living at least another 25 years
2 Cash is Rarely King – Inflation Eats Away at Your Purchasing Power
- A risk-averse saver who decides to keep their savings in cash will no longer earn enough interest to beat inflation at today’s low interest rates.
- The purchasing power of cash left on the sidelines, or the amount of goods that your money can buy, could decrease by more than half over a 40-year time horizon if inflation is 2% per year.
3 Start Early, and Re-invest Income – Compounding Works Miracles
- Compounding is what happens when you earn returns not only on your initial investment, but also on any accumulated gains from prior years, allowing you to accelerate capital growth over time.
- The power of compounding is so great that delaying investing by even just a few years, or choosing not to re-invest income, can make an enormous difference to your eventual returns
4 Returns and risks generally go hand in hand – Be realistic about your objectives and what you can achieve
- The strongest- performing investments since the early 2000s have tended to be those whose prices have been most volatile. Equities, for example have suffered some sharp swings in value, but they have delivered relatively strong annual returns compared to cash left in the bank.
- Therefore, if you want to target a higher level of return, you have to be willing, and able, to tolerate larger swings in the value of your investments along the way
5 Volatility is Normal – Keep Your Head When all About you are Losing Theirs
- Plan on riding out volatile market periods. While the market’s ups and downs are hard to predict, sharp declines are a fact of life and should be expected.
- Despite suffering intra-year declines every calendar year since 1986, the equity market still recovered to deliver positive returns over two thirds of the time
6 Timing the Market is Difficult – Staying Invested Matters
- Selling after the market has experienced a large fall is normally the wrong strategy as investors can lock in losses and miss out on the subsequent recovery.
- While markets can always have a bad day, week, month or even a bad year, history suggests investors are much less likely to suffer losses over longer periods. It’s important to keep a long-term perspective
- Despite a tumultuous ride for investors over the past 10 years, our analysis shows that a diversified portfolio has provided a much smoother ride than investing in stocks alone.
- Throughout history, a diversified portfolio of stocks, bonds and other asset classes has helped to limit sharp swings in returns.
Source for all information: Guide to the Markets – UK. Data as at 31 December 2020.
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