Strategies for investing long term aren’t built by aiming to make a fast dollar, or profiting from inside information. They are built over time, and most importantly, by learning how not to repeat the market mistakes of the past.
Let’s take a look at some ways you can build wealth over the long term.
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Here are three major positive factors that could have a big impact on investing long term
An end to energy scarcity: The price of oil has soared and collapsed several times since the 1970s. This is mainly because a big part of world oil supply comes from areas that are politically and militarily volatile. However, oil and natural gas production technology have made great advances. This has expanded potential oil supplies all around the world, and cut our dependence on the trouble-prone Middle East. It is leading to steadier oil supplies, and more stable prices.
This broadening in world oil sources will have far-reaching secondary benefits. Oil is so widely used that the drop in oil prices acts like a massive worldwide tax cut. In addition, and perhaps more important, the new supply sources will channel oil revenue away from bad actors and trouble-making regimes.
The gains could be long-lasting, cumulative, and surprisingly powerful.
Tax reform: The main obstacle to tax reform is that it benefits “the many” at the expense of “the few.” The many might save a few hundred or a thousand dollars each per year from tax reform. This can provide a great economic stimulus, but it’s too small for individual recipients to feel any great sense of gratitude.
The expense of tax reform falls on the shoulders of “the few.” Millions if not billions of dollars are at stake, and the handful of recipients get vicious when anybody tries to change things. That’s why politicians hate to tinker with items in the tax code that favour powerful interest groups.
The funny thing is that tax reform is more likely when a balance of power exists like when America’s Congress and White House are in different hands. That means both major parties have to agree on reforms, as they did in the 1980s. The powerful interests can’t take revenge on both parties. So they generally accept the loss in special favours, then try to think of ways to win them back.
Stocks versus bonds: One of the most basic decisions you face as an investor is to choose between stocks and fixed-return investments (bonds, GICs and so on). Stocks offer three key benefits that bonds lack: growth potential, an inflation hedge, and tax benefits.
In comparing stocks and bonds, stocks still look relatively safe and attractively priced. Bonds, in contrast, look expensive and at risk of a serious downturn.
2 strategies for investing long term
Compound interest—earning interest on interest—can have an enormous ballooning effect on the value of an investment over the long-term: Compound interest can be considered the mother of all long-term investment strategies. This tip is especially important for young investors to learn. This stock trading tip’s benefits apply to both stock and fixed-return, interest-paying investments, like bonds. When you earn a return on past returns, the value of your investment can multiply. Instead of rising at a steady rate, the number of dollars in your portfolio will grow at an accelerating rate.
To profit from this tip, you need to pay attention to steady drains on your capital, even seemingly small ones—like high brokerage commissions, say. If you’re losing (or missing out on a profit of) even 1% a year, it can have an enormous draining effect on your investments over a decade or two.
Dollar cost averaging as one of your strategies for investing long term
Dollar cost averaging is when you buy stocks gradually during the course of your working years. By using this strategy, market declines will have little effect on your long-term profits.
A dollar-cost averaging strategy involves investing equal amounts of money over a specific period.
It’s a little like systematic saving, except that you put your money into stocks (or ETFs) instead of a bank account.
If you invest a fixed sum at regular intervals throughout your working years, perhaps increasing that sum from time to time as your income rises, you can largely forget about market trends. That’s because you’ll automatically buy more shares when prices are low and fewer when they are high, and you will benefit from the long-term rising trend in the market.
All in all, if you implement dollar cost averaging, you’ll lower your long-term risk considerably.
What ideas, strategies, or investments you’ve made in your investing career come to mind when you think about investing long term? Please share your experience with us in the comments.
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