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While the stock market is uncertain, 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. However, good stocks can climb further, and poor stocks risk zeroing out completely. Below, we discuss ten tips for successful long-term investing that can help you prevent mistakes and generate some profits.
KEY TAKEAWAYS
- The stock market is uncertain, 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 sticking to it.
- If your time horizon allows it, focusing 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 “teabaggers”—investments that increased tenfold in value. He attributed his success to several 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. 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, judging companies on their merits is critical to determine whether a price justifies future potential.
Important: You can read Investopedia’s 10 Rules of Investing by copying our special issue print edition.
3. Don’t Sweat the Small Stuff
Rather than panic over an investment’s short-term movements, tracking its big-picture trajectory is better. Have confidence in an investment’s larger story, and don’t be swayed by short-term volatility.
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Don’t overemphasize the few cents difference you might save from using a limit versus market order. Sure, active traders use minute-to-minute fluctuations to lock in gains. However, 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 analyze a company before investing your hard-earned money.
Tips sometimes pan out, depending upon the source’s reliability, but long-term success demands deep-dive research.
5. Pick a Strategy and Stick With It
There are many ways to pick stocks, and sticking to a single philosophy is important. Vacillating between different approaches effectively makes you a market 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 is undervalued, and a high P/E ratio doesn’t necessarily mean a company is overvalued.
7. Focus on the Future and Keep a Long-Term Perspective
Investing requires making informed decisions based on events that have yet to happen. Past data can indicate future events, but they are never guaranteed.
In his 1989 bo” k One Up on Wall Str” et, Peter Lynch states,” “I’d bothered to ask myself, ‘How can this stock possibly go higher?’ I would never have bought a Subaru after it had already gone up twentyfold. But I checked the fundamentals, realized that Subaru was still cheap, bought the stock, and made sevenfold after th “It’s important to invest based on future potential rather than past performance.
While large short-term profits often entice market neophytes, long-term investing is essential to greater success. While short-term active trading can make money, it involves greater risk than buy-and-hold strategies.
8. Be Open-Minded
Many great companies are household names, but many good investments lack brand awareness. Furthermore, thousands of smaller companies can become tomorrow’s blue-chip names. Small-cap stocks have historically shown similar returns to their 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 Standard & Poor’s 500 Index (S&P 500) returned 9.66%.
This does not suggest that you devote your entire portfolio to small-cap stocks. However, many great companies exist outside the Dow 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 risks.
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 minimize tax liability, achieving high returns is the primary goal.
FAQs
1. What Is Long-Term Investing?
Ans: Long-term investing is 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 over a year. Investments held for less than a year are charged taxes at an investor’s ordinary income, which is less favorable than the capital gains tax rate.
2. What Is the Safest Investment With the Highest Return?
Ans: No investment is 100% safe, but some are safer than others, and some have higher returns. Such assets include certificates of deposit, high-yield savings accounts, Series I savings bonds, Treasury Bills, and money market funds.
3. What Are the Cons of Long-Term Investing?
Ans: The primary con of long-term investing is its opportunity cost. Funds 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, economic movements, 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. The above ten tips will make you a better investor and hopefully bring in some profits.
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