Reviewed and Updated by Gabe Ross on December 7, 2023
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Investors use the stock market to earn wealth. It is vital to choose the right investment strategy to help you increase the likelihood that you will achieve your financial goals and achieve success over the long-term.
The stock market is full of a plethora of opportunities and choices. The multitude of options can be overwhelming, with volatility and price fluctuations unnerving for many investors.
If you’re investing for the long-term, you’ll want to pursue your financial goals consistently and patiently. The central principle of long-term investment success is clearly defining on your financial goals and risk tolerance. These principles can help you work toward constructing a winning long-term investment portfolio:
- Align your investments with your financial goals and risk profile
- Diversify your portfolio
- Avoid market timing
- Reinvest dividends to benefit from the magic of compound interest
- Reassess your portfolio periodically
How Can You Align Your Investments with Your Financial Goals and Risk Profile?
Different investors will have different financial plans and levels of risk tolerance. You can gain insights and inspiration from others, but you should strive to build a unique portfolio that suits your own personal financial objectives and aligns with your risk profile.
It is important to define for yourself your investment goals and your desired timeframe. These might be different depending on whether you are working to earn retirement savings, fund your children’s education, or purchase a house. Your age is a factor as well, as it will influence both your investment horizon and level of risk.
Moreover, your financial goal and risk profile will determine what type of investment products you put into your portfolio. In investing, risk tolerance speaks to how much loss you are willing to accept. If you’re the risk-averse type, you might be better off packing your portfolio with less-volatile stocks, bonds, or Certificates of Deposit.
TipRanks’ insights can assist in your due diligence when you’re looking for stocks that suit your long-term investment taste.
Diversify Your Portfolio
The wisdom goes that you don’t put all your eggs in one basket. In line with that thinking, you should try to acquire a diverse collection of stocks in your portfolio in order to help spread out the risk.
To diversify, you may have a mix of domestic and international stocks in your portfolio. You may also want to have stocks that give you exposure to different industries or sectors. In tough economic times, some sectors tend to fare better than others. A diversified portfolio means that a setback in one group of stocks or select sectors doesn’t cause extensive damage across your entire portfolio. You can also diversify across market capitalization, where you have options such as micro-cap, small-cap, and large-cap stocks.
Avoid Market Timing
Time in the market beats timing the market, as the old saying goes. Time in the market means being there through the ups and downs, throughout your investment timeline. Those who try to time the market are trying to guess the best time to enter or exit an investment. As nobody can accurately predict the market, timing the market is very much a hit-and-miss investing strategy.
One way to avoid this risk is by practicing dollar-cost averaging investing. In this strategy, you invest a set amount of money at regular intervals such as on a weekly, monthly, or quarterly basis.
Dollar-cost averaging allows you to make continuous investments that expand your portfolio without worrying about market fluctuations. A well-structured long-term portfolio will outlast market volatilities, which is why dollar-cost averaging is a popular investing strategy.
Reinvest Dividends to Benefit from the Power of Compound Interest
Dividend-paying stocks are worth considering as part of a long-term portfolio strategy. Most of the companies that pay dividends distribute cash, though others issue extra shares as dividends to shareholders.
Investors have the option to withdraw their cash dividends to spend, or to reinvest the money in purchasing more shares through a Dividend Reinvestment Plan, or DRIP. Reinvesting dividends is a smart strategy to expand your portfolio and maximize your returns. The reinvested dividend allows you to own more shares of a stock, which in turn means more dividend cash for you in the future. As a result, dividend reinvesting drives compound growth in your portfolio.
Companies that pay dividends have different distribution schedules. While some may pay monthly dividends, others may prefer quarterly or yearly distributions. Regardless of the distribution schedule, make a point of reinvesting the dividend cash.
When evaluating stocks for their dividends, pay attention to dividend yield and dividend payout ratio. The dividend yield measures the return you’re getting on every dollar invested in a stock. The payout ratio tells you what fraction of a company’s profit goes into funding its dividend program. Higher yields and moderate payout ratios are favored. TipRanks’ dividend stocks tool can help you identify the highest-yielding dividend stocks.
Reassess your Portfolio Periodically
While like to think of a long-term investment as an opportunity to “set it and forget it”, it is always a good idea to go back and review your portfolio periodically. Life is unpredictable and so is the market, raising the need to adjust your investments accordingly.
Upon review, you may find that you are more heavily invested in domestic stocks than you had anticipated, making you miss out on growing international investment opportunities. Or you may find out that you are taking a more aggressive approach than you are comfortable with, and it would behoove you to make changes that better fit with a more appropriate level of risk.
Events like marriage, having kids, and early retirement are life changes that could cause you to reassess and fine-tune your portfolio as well. Reviewing your investments will help ensure that you to maintain a portfolio that aligns with your financial goals.
You may also see a need to adjust your portfolio as you approach the end of your investment timeline, especially for retirement portfolios, when it makes sense to shift your portfolio to less volatile stocks.
Recap – What are the Best Principles of a Long-term Investment Strategy?
The common denominator for any successful investment strategy begins with defining your financial objectives and risk profile. From this starting point, you can design a portfolio that will help you achieve your goals.
Investing more over time will help you expand your portfolio, allowing you to gradually increase your wealth. Make sure to use TipRanks’ stock research tools and follow astute stock analysis as you progress on your financial journey.
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