Stake logo

by Stella Ong
Share

Long-term investing tips: 10 Things to remember

Investing for the long-term is one of the keys for financial success, but it can be hard to stay the course. Here are 10 tips to help you on your journey.

Which is the best long-term investment?

When considering long-term investments, it's important to note that the best option can vary depending on your individual financial goals, risk tolerance, and market conditions. However, historically, ETFs that track the performance of a financial market index have been considered reliable long-term investment options.

The ASX 200 is an index that tracks the performance of 200 large-cap Australian stocks across various sectors, while the S&P 500 works similarly, selecting 500 large-cap U.S. stocks. They are often used as a benchmark for the overall stock market's performance. Over the long term, both the ASX 200 and the S&P 500 have shown consistent growth and have delivered attractive returns for long-term investors. However, it's important to remember that past performance is not indicative of future results.

In addition to these indexes, ETFs (Exchange-Traded Funds) can also be considered for long-term investments. An exchange-traded fund is an investment fund that trades on stock exchanges, and they provide exposure to a diversified portfolio of assets, such as stocks, bonds, or commodities.

Bonds can also be part of a long-term investment strategy, particularly for investors seeking lower-risk options. Bonds are fixed-income securities issued by governments, municipalities, or corporations to raise capital. They generally provide regular interest payments and return the principal amount at maturity. The returns on bonds can vary depending on factors like the issuer's credit rating, prevailing interest rates, and the bond's duration. U.S. and Australian Treasury bonds are often considered low-risk options.

It's important to note that while historical data can provide insights, the future performance of investments is never guaranteed. Diversification, careful research, and understanding your own financial objectives are crucial for making informed investment decisions.

10 tips for long-term investing

1. Understand where your current finances sit

Before diving into any investment strategy, it is crucial to have a clear understanding of your current financial situation. This involves evaluating your income, expenses, and cash flow. Start by assessing your income sources and determining how much money you have available for investing after covering your essential expenses.

This will give you an idea of your disposable income, which can be allocated towards your long-term investment goals.

In addition to understanding your income, it is equally important to assess your expenses. Keep track of your spending habits for a few months to identify where your money is going and identify potential areas for saving. This exercise will help you create a realistic budget and identify any opportunities to reduce unnecessary expenses, freeing up more funds for investment purposes.

Furthermore, understanding your debt and liabilities is essential. Make a comprehensive list of all outstanding loans, credit card balances, and any other financial obligations you may have. This evaluation will help you gauge your financial leverage and determine how much of your income is allocated towards debt repayment. It is important to consider how your current debt situation may impact your investment strategy and future financial goals.

2. Decide on your investment time horizon

Determining your investment time horizon is a critical step in building a successful long-term investment strategy. Your time horizon refers to the length of time you plan to stay invested before needing to access your funds. It is typically influenced by your financial goals and objectives.

Longer investment time horizons, such as those associated with retirement planning, generally allow for a more aggressive investment approach. This means you can allocate a higher percentage of your portfolio to higher-risk assets, such as stocks, with the expectation of greater potential returns over the long term. With a longer time horizon, you have the luxury of riding out short-term market fluctuations and benefiting from the power of compounding.

Conversely, shorter investment time horizons, such as saving for a down payment on a house or funding a child's education, require a more conservative investment approach. In this case, you may allocate a larger portion of your portfolio to lower-risk assets, such as bonds or cash equivalents, to preserve capital and reduce the impact of market volatility.

It is important to align your investment strategy with your time horizon to ensure that your investments are adequately diversified and tailored to meet your specific financial goals. Regularly reassess your investing strategy with your time horizon, as it may change over time due to evolving financial objectives and circumstances.

3. Create your investment strategy

Developing a well-defined investment strategy is crucial for long-term investment success. Your investment strategy serves as a roadmap, outlining your financial goals, risk tolerance, and asset allocation. Here are some key components to consider when creating your investment strategy:

  1. Define your financial goals: Clearly define your financial objectives. Are you saving for retirement, buying a house, or funding your child's education? Establishing specific goals will help you determine the amount of money you need to save and the investment returns required to achieve those goals.
  2. Assess your risk tolerance: Understand your ability to tolerate fluctuations in the value of your investments. Consider factors such as your age, income stability, and overall financial situation. A higher risk tolerance may allow you to invest a larger portion of your portfolio in growth-oriented assets, whereas a lower risk tolerance may warrant a more conservative investment approach.
  3. Determine your asset allocation: Allocate your investment portfolio across different asset classes, such as stocks, bonds, and real estate, to manage risk effectively. Asset allocation helps diversify your investments and reduce the impact of market volatility. Consider your risk tolerance, time horizon, and financial goals when determining the optimal mix of assets.
  4. Choose your investment vehicles: Once you have determined your asset allocation, select the specific investment vehicles that will help you achieve your goals. These may include individual stocks, mutual funds, investment funds like ETFs, or real estate investment trusts (REITs). Research each investment option, considering factors such as historical performance, fees, and the expertise of the fund managers. It's important to diversify within each asset class by investing in a range of companies or funds to further spread risk.
  5. Monitor and review: Regularly monitor your investments and review your investment strategy. Keep an eye on market trends, economic indicators, and changes in your financial situation. Reassess your goals periodically and make adjustments as needed. Market conditions and personal circumstances may change, requiring you to rebalance your portfolio or make strategic shifts to align with your evolving goals.

Creating a comprehensive investment strategy helps you maintain discipline, avoid impulsive decisions, and stay focused on your long-term objectives. It provides a framework for consistent decision-making and helps you navigate the complex world of investing with confidence.

🎓 Learn more: What is dollar cost averaging?

🎓 Learn more: Growth investing: The complete guide for beginners

4. Diversification

Diversification is a fundamental principle of successful long-term investing. It involves spreading your investments across different asset classes, sectors, geographic regions, and even investment strategies. The purpose of diversification is to reduce the impact of any individual investment's underperformance on your overall portfolio.

By diversifying your portfolio, you can potentially lower your risk while still aiming for attractive returns. Different asset classes, such as stocks, bonds, and real estate, often have unique characteristics and respond differently to market conditions. When one asset class is experiencing a downturn, others may be performing well, helping to mitigate losses.

Diversification can be achieved through various methods, such as investing in mutual funds or ETFs that provide exposure to a range of assets, or by directly allocating your investments across different asset classes.

5. Know about the cost of investing

Understanding the costs associated with investing is essential for optimising your long-term returns. Investment costs can impact your overall portfolio performance, so it's important to be aware of the fees and expenses you may incur.

When investing in mutual funds or ETFs, pay attention to expense ratios, which represent the annual fees charged by the fund company. Compare the expense ratios of different funds and choose those with lower costs, as higher expenses can eat into your returns over time. Additionally, some funds may have sales loads or transaction fees, so it's important to consider these costs as well.

Make sure to select a platform that charges reasonably priced brokerage fees. Stake pricing is consistent, transparent and simple with just $3 brokerage for trades up to $30,000 or 0.01% on trades above $30,000 (in AUD for Stake AUS and USD for Stake Wall St).

6. Be ready to rebalance if necessary

Market conditions and asset performance can cause your portfolio to deviate from your original asset allocation. Rebalancing is the process of realigning your portfolio to its intended allocation, ensuring that your initial investment strategy remains on track.

When certain investments outperform others, their increased value can lead to an overweighting of those assets in your portfolio. Similarly, underperforming investments may cause your portfolio to be underweight in specific areas.

Rebalancing allows you to maintain the desired risk profile and asset allocation that aligns with your investment strategy. It helps control risk by preventing your portfolio from becoming overly concentrated in a single investment or asset class. Regularly review your portfolio's performance and rebalance if the deviation from your target allocation exceeds your predetermined thresholds.

7. Don't forget about capital gains tax

When investing, it's important to consider the potential impact of capital gains tax on your investment returns. Capital gains tax is applied to the profits earned from selling certain assets and receiving distributions. Some of the assets include stocks, bonds, or real estate, and can significantly affect your after-tax returns on financial investments.

The capital gains tax to pay on shares depends on various factors, including your income level and the holding period of the asset.

🎓 Learn more: How does capital gains tax work in Australia?

8. Don't panic over short-term volatility

Financial markets are prone to short-term volatility, driven by various factors such as economic indicators, geopolitical events, and investor sentiment. It is crucial to avoid making impulsive decisions based on short-term market fluctuations.

Market volatility is a normal part of investing, and it's essential to maintain a long-term perspective to avoid the common pitfalls of stock trading. History has shown that markets tend to recover from downturns and deliver positive returns over the long run. Trying to time the market by making reactive moves in response to short-term volatility is challenging and can often lead to missed opportunities.

Stick to your long-term investment strategy and goals, focusing on the fundamentals of your investments rather than short-term noise. Remember that successful investing requires discipline and patience. By staying invested and riding out the waves of volatility, you can increase your chances of achieving long-term financial growth.

9. Do your own research, don't FOMO in

While seeking advice from financial professionals is valuable, it is equally important to conduct your own research and make informed decisions. Financial markets are dynamic, and it's essential to stay informed about market trends, industry developments, and individual investment opportunities.

Take the time to research potential investments, understand their underlying fundamentals, and evaluate their historical performance. Consider factors such as the company's financial health, competitive position, and growth prospects. Diversify your sources of information and consult reputable financial news outlets, industry publications, and reliable research reports.

Avoid succumbing to FOMO (Fear of Missing Out) and chasing hot investment trends without thorough analysis. Emotional decision-making based on fear or excitement can lead to impulsive and potentially detrimental investment choices. By doing your own research, you gain a deeper understanding of your investments, increase your confidence, and make more informed decisions aligned with your long-term goals.
🎓 Learn more: How to research stocks?

10. Reassess and refine

Investing is an ongoing process that requires regular reassessment and refinement. Your financial goals, risk tolerance, and market conditions may change over time, necessitating adjustments to your investment strategy.

Periodically review your portfolio's performance and assess whether it aligns with your long-term objectives. Consider factors such as the progress towards your financial goals, changes in personal circumstances, and shifts in market conditions. If necessary, make adjustments to your asset allocation, investment vehicles, or risk management strategies to ensure they remain in line with your evolving needs.

Reassessing and refining your investment strategy helps ensure that it remains relevant and effective. Regularly engage with your financial advisor to discuss any changes in your financial situation, gain insights on new investment opportunities, and fine-tune your approach. By staying proactive and adaptive, you can optimise your long-term investment returns and navigate the ever-changing landscape of the financial markets.

Long-term investing FAQs

Why is long-term investing good?

Long-term investing is beneficial because it allows for the potential of compounding returns, smooths out market volatility, capitalises on economic growth, overcomes market timing challenges, aligns with business cycles, and provides potential tax benefits, ultimately increasing the likelihood of achieving financial goals and maximising investment returns over an extended period.

What is an example of a long-term investment decision?

One example of a long-term investment decision is investing in a broadly diversified fund or exchange-traded funds (ETFs) that track a broad market index.

By allocating funds to a diverse range of stocks across various sectors and industries, this strategy aims to capture the long-term growth potential of the overall market. The investor adopts a buy-and-hold approach, staying invested in the portfolio for an extended period, typically years or even decades, allowing their investments to benefit from compounding returns and the potential for steady growth over time.

Are dividend stocks a good long-term investment?

Dividend stocks can be a good long-term investment for investors seeking regular income and potential capital appreciation. Dividend-paying companies often have established track records, stable cash flows, and a commitment to sharing profits with shareholders.

By reinvesting dividends or using them as a source of passive income, investors can benefit from compounding returns over time. Dividend stocks can provide a level of stability to a portfolio, especially during market downturns, and they can be particularly attractive for income-focused investors.


Portrait photo of Stella Ong, Markets Analyst at Stake.

Stella Ong

Markets Analyst

Stella is a markets analyst and writer with almost a decade of investing experience. With a Masters in Accounting from the University of Sydney, she specialises in financial statement analysis and financial modelling. Previously, she worked as an equity analyst at Australian finance start-up, Simply Wall St, where she took charge of the market insights newsletter sent out to over a million subscribers. At Stake, Stella has been key to producing the weekly Wrap articles and social media content.


Related


Want more?

You know what to do

Insights, trends and company deep dives delivered straight to your inbox.


Stake logo
Over 7,000 5-star reviews
App Store logoGoogle Play logo

Subscribe to our free newsletters

By subscribing, you agree to our Privacy Policy.

Stakeshop Pty Ltd, trading as Stake, ACN 610105505, is an authorised representative (Authorised Representative No. 1241398) of Sanlam Private Wealth Pty Ltd (Australian Financial Services Licence No. 337927) ('Sanlam') and an authorised representative (Authorised Representative No. 1241398) of Airwallex Pty Ltd (Australian Financial Services Licence No. 487221) ('Airwallex'). Stake is not authorised by Airwallex under Airwallex’s AFSL to arrange for clients to be issued with securities as Airwallex is not authorised under its AFSL for this purpose. Stake is not authorised by Sanlam under Sanlam’s AFSL to arrange for clients to be issued with a non-cash payment facility as Sanlam is not authorised under its AFSL for this purpose. Stake SMSF Pty Ltd (‘Stake Super’) is not licensed to provide financial product advice under the Corporations Act. This specifically applies to any financial products which are established if you instruct Stake Super to set up a self managed super fund (‘SMSF’). When you sign up to Stake Super, you are contracting with Stake SMSF Pty Ltd who will assist in the establishment of a SMSF under a ‘no advice model’. You will also be referred to Stakeshop Pty Ltd to enable your trading account and bank account to be set up in order to use the Stake Website and/or App. Stakeshop Pty Ltd will also run marketing and promotions to you under. For more information about SMSFs, see our SMSF Risks page.The information on our website or our mobile application is not intended to be an inducement, offer or solicitation to anyone in any jurisdiction in which Stake is not regulated or able to market its services. At Stake and Stake Super, we’re focused on giving you a better investing experience but we don’t take into account your personal objectives, circumstances or financial needs. Any advice given by Stake is of a general nature only. As investments carry risk, before making any investment decision, please consider if it’s right for you and seek appropriate taxation and legal advice. Please view our Financial Services GuideTerms & ConditionsPrivacy Policy and Disclaimers  before deciding to invest on or use Stake or Stake Super. By using our website or service in any way, you agree to our Privacy Policy and Terms & Conditions. All financial products involve risk and you should ensure you understand the risks involved as certain financial products may not be suitable to everyone. Past performance of any product described on this website is not a reliable indication of future performance. Stake and Stake Super are registered trademarks in Australia.

Copyright © 2024 Stake. All rights reserved.