Ten Tips for Successful Long-Term Investing
By INVESTOPEDIA STAFF
Jun 25, 2019
market is riddled with uncertainty, certain tried-and-true principles
can help investors boost their chances for long-term success. Here are 10
fundamental concepts every investor should know:
investors lock in profits by selling their appreciated investments, while
holding onto underperforming stocks they hope will rebound. But good
stocks can climb further, and poor stocks risk zeroing out completely. The
following information can help navigate these decisions.
Ten Tips For the Successful Long-Term Investor
1.Riding a Winner
Peter Lynch famously
spoke about "tenbaggers"-investments
that increased tenfold in value. He attributed his success to a small number of
these stocks in his portfolio. But
this required the discipline of hanging onto stocks even after they’ve
increased by many multiples, if he thought there was still significant upside
potential.1 The takeaway: avoid clinging to arbitrary rules, and
consider a stock on its own merits.
2.Selling a Loser
is no guarantee that a stock will rebound after a protracted decline, and it’s
important to be realistic about the prospect of poorly-performing investments.
And even though acknowledging losing stocks can psychologically signal failure,
there is no shame recognizing mistakes and selling off investments to stem
3.Don't Chase a Hot Tip
of the source, never accept a stock tip as valid. Always do your own analysis
on a company, before investing your hard-earned money. While tips sometimes pan
out, long-term success demands deep-dive research.
4.Don't Sweat the Small Stuff
over an investment’s short-term movements, it’s better to track its
big-picture trajectory. Have confidence in an investment’s larger story, and
don’t be swayed by short-term volatility.
overemphasize the few cents difference you might save from using a limit versus market order.
traders use minute-to-minute fluctuations to lock in gains. But
long-term investors succeed based on periods of time lasting years or more.
5.Don't Overemphasize the P/E Ratio
often place great importance on price-earnings ratios, but placing too much
emphasis on a single metric is ill-advised. P/E ratios are
best used in conjunction with other analytical processes. Therefore a low P/E
ratio doesn't necessarily mean a security is undervalued,
nor does a high P/E ratio necessarily mean a company is overvalued.
6.Resist the Lure of Penny Stocks
mistakenly believe there’s less to lose with low-priced stocks. But whether a
$5 stock plunges to $0, or a $75 stock does the same, you've lost 100% of your
initial investment, therefore both stocks carry similar downside risk. In
stocks are likely riskier than higher-priced stocks, because they tend to
be less regulated.
7.Pick a Strategy and Stick With It
are many ways to pick stocks, and it’s important to stick with a single
philosophy. Vacillating between different approaches effectively makes you
timer, which is dangerous territory. Consider how noted investor Warren
Buffett stuck to his value-oriented strategy, and steered clear of the
dotcom boom of the late '90s—consequently avoiding major losses when tech
8.Focus on the Future
requires making informed decisions based on things that have yet to happen.
Past data can indicate things to come, but it’s never guaranteed.
1989 book "One Up on Wall Street"
Peter Lynch stated: "If I'd bothered to ask myself, 'How can this stock
possibly go higher?' I would never have bought Subaru after it already had gone
up twentyfold. But I checked the fundamentals,
realized that Subaru was still cheap, bought the stock, and made sevenfold
after that."2 It’s important to invest based on future
potential versus past performance
9.Adopt a Long-Term Perspective
large short-term profits can often entice market neophytes, long-term investing
is essential to greater success. And while active trading short-term trading
can make money, this involves greater risk than buy-and-hold strategies.
great companies are household names, but many good investments lack brand
awareness. Furthermore, thousands of smaller companies have the potential to
become the blue-chip names of tomorrow. In fact, small-caps stocks
have historically shown greater returns than their large-cap counterparts.
From 1926 to 2017, small-cap stocks in the U.S. returned an average of 12.1%
while the Standard
& Poor's 500 Index (S&P 500) returned 10.2%.3
not to suggest that you should devote your entire portfolio to small-cap
stocks. But there are many great companies beyond those in the Dow Jones Industrial
Concerned About Taxes, but Don't Worry
taxes above all else can cause investors to make misguided decisions. While tax
implications are important, they are secondary to investing and securely
growing your money. While you should strive to minimize tax liability,
achieving high returns is the primary goal.