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7 Principles for Successful Long-Term Investing

One of the simplest, yet most effective pieces of wisdom on investing comes from Warren Buffett. He once made the observation that the stock market is a device designed to transfer money from the impatient to the patient, and he was absolutely right. Success in investing doesn’t happen overnight – it takes time, patience and discipline. 

As a Robo-advisor, arty was developed with an aim to find the most optimum allocations based on AI backed data. This came with the realisation that the appeal of an investment is driven by its long-term durability, as opposed to other short-term trading considerations. 

In today’s short-term oriented market, we believe that a long-term investing approach is increasingly valuable. 

Whether you’ve been an investor for decades and are looking to reinforce the key habits of successful long-term investing or have only recently become interested in understanding the principles of successful long-term investing, this article will help you improve your odds of high returns in the long run. 

From our experience in the industry, here are 7 principles for successful long-term investing:

1. Look at the big picture

Making an investment means making an informed decision based on things that haven’t happened yet, so while past data can sometimes forecast things to come, it’s never guaranteed. 

Peter Lynch wrote in his book “One Up on Wall Street” that if he’d asked himself the question: ‘how can this stock possibly go higher?’ He would never have acquired Subaru after it had already increased in value by twentyfold. 

However, when he realized that Subaru was still cheap, he bought the stock and made another sevenfold on top of that. This reminds us how important it is to invest based on future potential as opposed to past performance. 

2. Stick to your strategy and avoid market timing

There are lots of ways to pick stocks, and it’s important to stick with a philosophy that works for you. Structure your portfolio along the dimensions of expected returns. When you start switching between different strategies, you fall into the territory of market timing, which is something you want to avoid as a long-term investor. 

Chris Boyle, another noteworthy investor, once said that though it’s tempting, trying to time the market is a loser’s game. He explained that “$10,000 continuously invested in the market over the past 20 years grew to more than $48,000. If you missed just the best 30 days, your investment was reduced to $9,900.”  

Remember, the greatest way to judge your investment performance is not by whether you’re outsmarting the market but by whether you’ve put in place a solid financial plan and have a strong behavioural discipline that will lead you where you want to go. 

3. Understand the odds

You need to understand the odds of actually picking a winner. If you toss a coin, you have a 50/50 chance of obtaining heads or tails. Similarly, the chances of picking an investment that will still be around 20 years later are about the same, and in terms of outperformance, the chances are even slimmer. This is because the market’s pricing works against fund managers who try to outperform the market by timing it.  

4. Keep emotions in check

Benjamin Graham, commonly known as the father of value investing, once said that “the investor’s chief problem—and his worst enemy—is likely to be himself. In the end, how your investments behave is much less important than how you behave.” 

Many people find it difficult to separate their emotions from their investments. Markets will always fluctuate in value, but reacting to current market conditions can often lead to poor investing decisions. Rather than getting worked up over a stock’s short-term swings, it’s wiser to keep an eye on its long-term trajectory.

Don’t be scared by short-term volatility; instead, be mentally prepared to face declines in your portfolio every few years. Stock prices will naturally fluctuate on account of people’s tendency to speculate, so just have faith in the investment’s bigger picture.  

5. Resist the “hot tips”

Reading market news and reacting to hot tips on a daily basis might put your investment discipline to the test. Some messages you receive make you worry about the future, while others encourage you to invest in the latest fad.

Consider the sources before spending your hard-earned money, and always conduct your own research on a company. When the headlines are alarming, do your best to maintain a long-term perspective. 

6. Be open-minded

While some amazing companies are already well-known, there are so many that are yet to rise to fame. Indeed, there are thousands of smaller businesses with the potential to become the household names of tomorrow and historically, small-cap stocks have actually outperformed their large-cap peers.

Indeed, Warren Buffett famously once said “I make no attempt to forecast the market—my efforts are devoted to finding undervalued securities.” 

7. Diversify

With multiple natural disasters, geopolitical conflicts, pandemics, and market downturns, the last ten years have been a rough ride for investors. The next ten years will almost certainly be as turbulent, with various sources of unpredictability. Investors should always be prepared for the consequences of a downturn.  

Spreading your portfolio across a variety of assets allows you to hedge your bets and increase the likelihood of holding a winner at any given time during the course of your extended investing horizon. Your asset allocation might start with a mix of equities and bonds, but diversification goes much further.

Consider the following sorts of investments, among others, in the components of your portfolio: Large-company stocks, mid-company stocks, small-company stocks, value stocks, growth stocks and ETFs.  

ETFs have significant built-in diversification because they invest in dozens (or even hundreds) of companies. This means that one stock’s poor performance may be balanced out by the other, higher-performing stocks. While one company’s fortunes may decline, the worth of a group of companies is less likely to be as volatile. 

You should also consider global diversification. While diversification helps to mitigate risks that have no expected return, it may not be enough to diversify simply inside your local market.

Diversifying on an international scale, on the other hand, can extend your investing options. Investors that have a globally diversified portfolio are well-stationed to take advantage of opportunities wherever they arise. 

So, how do you incorporate these principles into your investment approach? 

Overall, investing is about focusing on your financial objectives while disregarding the fickle nature of the markets and the media that covers them. That implies, regardless of any news that would tempt you to try to time the market, that you should stick to your course and invest for the long term. If you’re only every looking 12 months ahead, you’re trading instead of investing. 

As a result, as long as one does not overpay for any stock, maintains proper diversity, and avoids extremely speculative, loss-making enterprises, there is no reason why long-term investing won’t produce excellent results.  

Key takeaways:

  • Create an investment strategy that is tailored to your needs and risk tolerance. 
  • Create a portfolio based on the projected return dimensions. 
  • Focus on the bigger picture. 
  • Control your emotions and stay disciplined during market swings.  
  • Build a globally diversified portfolio that includes ETFs for optimum returns and reduced risk. 

Here at arty we are continuously focused on improving our craft, and as a result, have years of wisdom to share when it comes to success in long-term investing. 

We also have a strong passion for the democratization of the investment sector and want to share this expertise with the world. If you are interested in learning more about how you can optimize your portfolio for the best results, get in touch with arty!  

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