At the height of the coronavirus-induced financial crisis in March of 2020, the stock market received a massive injection of new investors who had witnessed an opportunity to make some cash. And so, they did. But now, they might not know what to do with this windfall, allowing it to either lay dormant in an account, or perhaps using it to buy flash-in-the-pan stocks (both of which aren’t great options for long term growth).
A long-term investment strategy is critical for every investor – novice or seasonal, young or old. This gives you a sense of what you are trying to accomplish with each transaction. Plus, it prevents you from getting sucked into the vortex of volatility and casino euphoria.
So, where do you begin? We have compiled a list of seven effective long-term investing tips for beginners:
1. Remove Emotion from the Equation
You have your hard-earned dollars in stocks. You see a position up 5% one session and down 10% the next session. For whatever reason, the volatility is real right now. Everyone is talking about “yolo,” “fomo,” and “to the moon.” Should you ditch your trading strategy and hop on whatever bandwagon there is? It can be hard to avoid the hype!
It is imperative to remove emotion from the equation when it comes to trading stock, particularly if you are a long-term investor. It can be challenging, but experts recommend that you manage your investments with calm and composure, without giving in to the impulse to make a rash decision based on the latest trend. Ultimately, try to be as neutral about your stocks as possible.
2. Choose a Strategy
What is your strategy as a long-term investor? Are you seeking growth? Are you searching for income? Are you picking stocks or buying exchange-traded funds (ETFs)? Are you looking for a passive or active approach to investment? Is this your retirement fund?
When you initiate your investment journey, it is important to devise a long-term plan eventually. This way, no matter what gamma squeeze, short squeeze, or tight squeeze occurs, you can remain steadfast in your quest to enjoy realized gains when you finally hit the sell button or cash out your mutual fund.
Many beginner investors looking for long term growth are taking advantage of an all-in-one checking and investing account such as Finch which offers a convenient, stress-free approach to investing, with options to adjust your strategy as your long-term goals change.
3. Don’t Focus on Short-Term Movements
Have you been following the GameStop saga? No matter your opinion, the stock skyrocketed from a few bucks to as high as $300 in a week. Any novice investor who had a trading account bought shares in the company. While everyone is talking about the gains right now, the aftermath could be ugly for anyone who purchases a stake at the very top.
GameStop fundamentals are not strong, which is why hedge funds shorted (bet against) the stock. But many saw the massive growth and perhaps participated in the spike.
Is this a sound long-term strategy? Unless you got in on the ground floor, it could be dangerous to begin surfing midway in these tidal waves.
The same could be applied to your overall investments. You may panic if shares crash, or you may have euphoria if shares soar. Either way, it is crucial to concentrate on the bigger picture and not what transpires over a few trading sessions.
4. Dollar-Cost Averaging
One of the greatest tactics in long-term investing is dollar-cost averaging, or DCA. This is when investors make periodic purchases of a specific asset to avoid the effects of volatility. Here is an example:
- One month, you buy 25 shares at $23.51.
- Another month, you purchase 25 shares at $21.23.
- A month later, you acquire 25 shares at $25.75.
- The month after, you scoop up 25 shares at $24.12.
- The dollar-cost average? $23.81.
Now, obviously, if there is a massive crash in the broader financial market that is sending your stock lower by half, then you should consider buying more. This is what happened at the height of the coronavirus-induced market meltdown for some of the market’s most popular stocks.
5. Refrain from Going Overboard
If stock trading is a part of your long-term investment strategy, you might be tempted to start buying shares in all sorts of different companies. But is more really better? Not necessarily.
Many free trading platforms make it attractive to buy stocks within all kinds of companies, but this is a fool’s errand that will not lead to too many gains. Unless you are a billionaire hedge fund or a member of r/WallStreetBets and are putting tens of thousands of dollars into different stocks, you waste time and money by holding a dozen or so stocks.
The solution? When you are starting out, aim to fill your portfolio with one to three stocks. After you have achieved some success, you can expand your horizons and cap your list at eight. Anything more is going overboard.
6. Diversify Your Portfolio
The key to a successful long-term investing strategy is diversification. The most successful investors in history have diversified their portfolios. At the same time, it is important not to over-diversify because then it suggests that you do not know what you are doing. It is a balancing act, indeed.
An example of a diversified portfolio is the Swensen Model of Asset Allocation. It looks like this:
- 30% bonds
- 20% real estate funds
- 30% domestic stocks
- 5% emerging market domestic stocks
- 15% developed world stocks
As you gain comfort and confidence in the investment process, prioritize smart diversification of your portfolio, using these percentages as a guideline.
7. Forget Penny Stocks
A penny stock is the name of any small company’s stock that generally trades for less than $5 per share. A penny stock turning into the next Amazon overnight is about as likely as winning the lottery. Even a $0.50 stock turning into a $20 one is a rare phenomenon. If you are confident or passionate in a company’s products or services, there is no harm acquiring 100 shares, but take note that penny stocks are widely considered high-risk investments. Therefore, is not worth putting a massive stake in these penny stocks since the odds of high or consistent returns are extremely low.
In today’s environment of ultra-low interest rates and rising price inflation, your savings could be devalued over time. As a result, you may need to get more involved in the financial markets to ensure your hard-earned dollars and cents are not eroded by external factors. A long-term investment strategy is the best way to balance inflation risks and allow your money to work for you.