While the stock market is riddled with uncertainty, certain tried-and-true principles can help investors boost their chances for long-term success.
Some 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. Below we discuss 10 tips for successful long-term investing that can help you prevent mistakes and hopefully generate some profits.
- The stock market is riddled with uncertainty, but certain tried-and-true principles can help investors boost their chances for long-term success.
- Some of the more important basic investment advice includes riding winners and selling losers; avoiding the urge to chase "hot tips"; resisting the lure of penny stocks; and picking a strategy and then sticking to it.
- If your time horizon allows it, a focus on the future with an eye toward long-term investment can maximize profits for almost any investor.
1. Ride 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 hisportfolio.
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. The takeaway: avoid clinging to arbitrary rules, and consider a stock on its own merits.
2. Sell a Loser
There 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 in recognizing mistakes and selling off investments to stem further loss.
In both scenarios, it’s critical to judge companies on their merits, to determine whether a price justifies future potential.
Read about Investopedia's 10 Rules of Investing by picking up a copy of our special issue print edition.
3. Don't Sweat the Small Stuff
Rather than panic 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.
Don't overemphasize the few cents difference you might save from using alimitversusmarket order. Sure, active traders use minute-to-minute fluctuations to lock in gains. But long-term investors succeed based on periods lasting 20 years or more.
4. Don't Chase a Hot Tip
Regardless of the source, never accept a stock tip as valid. Always do your own analysis of a company before investing your hard-earned money.
Tips do sometimes pan out, depending upon the reliability of the source, but long-term success demands deep-dive research.
5. Pick a Strategy and Stick With It
There are many ways to pick stocks, and it’s important to stick with a single philosophy. Vacillating between different approaches effectively makes you amarket 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 startups crashed.
6. Don't Overemphasize the P/E Ratio
Investors 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 isundervalued, nor does a high P/E ratio necessarily mean a company isovervalued.
7. Focus on the Future and Keep a Long-Term Perspective
Investing requires making informed decisions based on things that have yet to happen. Past data can indicate things to come, but it’s never guaranteed.
In his 1989 book "One Up onWall 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 thefundamentals, realized that Subaru was still cheap, bought the stock, and made sevenfold after that." It’s important to invest based on future potential versus past performance.
While large short-term profits can often entice market neophytes, long-term investing is essential to greater success. And while short-term active trading can make money, this involves greater risk thanbuy-and-holdstrategies.
8. Be Open-Minded
Many 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 oftomorrow. In fact,small-capstocks have historically shown similar returns totheir large-cap counterparts.
From 2000 to 2023, small-cap stocks in the U.S. returned a compound annual growth rate of 8.59% based on the MSCI World Small Cap Index while the returned 9.66%.
This is not to suggest that you should devote your entire portfolio to small-cap stocks. But there are many great companies beyond those in theDow Jones Industrial Average(DJIA).
9. Resist the Lure of Penny Stocks
Some 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, so both stocks carry similar downside risk.
In fact, penny stocks are likely riskier than higher-priced stocks because they tend to be less regulated and often see much more volatility.
10. Be Aware of Taxes
Putting 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.
What Is Long-Term Investing?
Long-term investing is generally considered to be three years or more. Holding onto an asset, such as stocks or real estate for more than three years is considered long-term. When individuals sell assets at a profit, capital gains taxes are charged for investments held for longer than one year. Investments held for less than a year are charged taxes at an investor's ordinary income, which is not as favorable as the capital gains tax rate.
What Is the Safest Investment With the Highest Return?
No investment is 100% safe but some are safer than others, and of those, some have higher returns. Such assets include certificates of deposit, high-yield savings accounts, Series I savings bonds, Treasury Bills, and money market funds.
What Are the Cons of Long-Term Investing?
The primary con of long-term investing is its opportunity cost. Funds that are tied up in long-term investments cannot be used for other investments, particularly short-term profitable opportunities. This may not be an issue in the future if the long-term investments bring in enough profit.
The Bottom Line
Investing in stocks never guarantees profits and can be challenging due to the constant fluctuation of the markets, movements in the economy, policy changes, world events, and more. Even with a lot of research, it can be hard to pick a winner or know when a winner becomes a loser and vice versa. Heeding to the above 10 tips can help make you a better investor and hopefully bring in some profits.
As an avid investor with a deep understanding of financial markets and investment strategies, I find the principles outlined in the article to be both insightful and crucial for anyone looking to achieve long-term success in the stock market. Let me break down each concept mentioned in the article to demonstrate my expertise:
Ride a Winner:
- This principle, popularized by Peter Lynch, emphasizes the importance of holding onto successful investments even after significant gains. Lynch's strategy of identifying "tenbaggers" underscores the potential for substantial returns by staying invested in high-performing stocks.
Sell a Loser:
- Acknowledging the possibility of poor-performing investments and being realistic about cutting losses is a key aspect of risk management. The article rightly advises investors to evaluate companies based on their merits and determine whether the price justifies future potential.
Don't Sweat the Small Stuff:
- Long-term investors are encouraged to focus on the big-picture trajectory of their investments rather than being swayed by short-term market fluctuations. This aligns with the approach of successful investors who prioritize the overall story and fundamentals of their holdings.
Don't Chase a Hot Tip:
- Conducting thorough research and avoiding reliance on stock tips is a fundamental principle. Long-term success demands deep-dive analysis, and investors should be wary of making decisions based solely on external recommendations.
Pick a Strategy and Stick With It:
- The importance of consistency in investment strategy is highlighted here. Warren Buffett's adherence to a value-oriented approach during the dotcom boom serves as a prime example of how sticking to a single philosophy can mitigate risks and enhance long-term gains.
Don't Overemphasize the P/E Ratio:
- The article wisely advises against placing excessive importance on a single metric, such as the price-earnings ratio. Emphasizing the need for a comprehensive analytical approach, it recognizes that multiple factors contribute to a thorough investment assessment.
Focus on the Future and Keep a Long-Term Perspective:
- Investing based on future potential rather than past performance is a key strategy. Peter Lynch's quote from "One Up on Wall Street" reinforces the idea that successful investors anticipate future developments and trends.
- The article emphasizes the potential of lesser-known companies and the importance of staying open-minded. It points out that small-cap stocks, historically, have shown similar returns to their large-cap counterparts, encouraging investors to look beyond well-known names.
Resist the Lure of Penny Stocks:
- Dispelling the misconception that low-priced stocks are less risky, the article correctly asserts that penny stocks can be riskier due to lower regulation and increased volatility. It underlines the importance of understanding the risks associated with any investment.
Be Aware of Taxes:
- While acknowledging the significance of tax implications, the article rightly places investing and growing one's wealth as the primary goal. It emphasizes the need to strike a balance between minimizing tax liability and achieving high returns.
In conclusion, these principles form a comprehensive guide for successful long-term investing, addressing various aspects of risk management, strategic decision-making, and the importance of a disciplined approach.