Topic: How To Invest

How to make a successful long term investment decision? Here are some key pointers

Discover our suggestions on how to make a successful long-term investment decision, plus tips on the magic of compounding and “averaging in” for better results

Long-term investment strategies 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.

If you are wondering how to make a successful long-term investment decision—or decisions— for maximum portfolio gains, consider the following tips and strategies.

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The magic of compounding just adds to the value of a sound and successful long-term investment decision

Compound interest is earning interest on interest. Over time, your long-term investments will earn more and more money from the effects of compound interest. Compound interest is what makes investing a worthwhile pursuit.

Note, though, that the magic of compounding can also be applied to equity investments like stocks—not just fixed-return, interest-paying investments like bonds. When you earn a return on past investment 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. The compounding effect can be heightened when investors reinvest dividends.

Averaging in is a good way to implement a successful long-term investment decision

“Averaging in” is the practice of adding a fixed or rising sum of money to your portfolio on a regular schedule—be that every week, month or year—regardless of your view of the stock-market outlook.

When you make a habit of averaging in over a period of years if not decades, you are betting that the stock market will continue to rise over a lengthy period. That’s the smart way to bet, because the market generally does go up over long periods.

You should only change your periodic investment schedule because of a change in funds you have available. In contrast, many investors only add funds to their stock portfolio at times when they think the market is going to go up. All too often, they guess wrong. They add to their portfolios as the market goes down instead of up.

If you regularly average in, you will at times add money to your portfolio just before a plunge in stock prices. Other times, you’ll buy more stocks just prior to a rise. Over long periods, you will automatically buy more often when the timing is good and stocks are headed for a rise. That’s because stock prices go up more often than they drop.

The beauty of averaging in is that by investing the same sum every year or whichever period you choose, you automatically buy more shares when prices are low and fewer when they’re high. The tactic works best when you start it early in your investing career and stick with it.

Looking at both value stocks and growth stocks should factor into how to make a successful long term investment decision

If you balance and diversify your portfolio as we recommend, it should include both growth and value selections. In both areas, however, you should avoid extremes.

If a stock seems like an exceptional bargain in relation to earnings or asset values, it may suffer from hidden risks. The stock can plunge when those problems begin to take their toll.

On the other hand, if a growth stock trades at such a high price that it needs exceptional results to move ahead, then it suffers from obvious rather than hidden risk: a single quarter of bad earnings can spark a collapse in its value.

Looking closer at value stocks:

The core of the long-term value investing approach is identifying well-financed companies that are established in their businesses and have a history of earnings and dividends. They are likely to survive any economic setback that comes along, and thrive anew when prosperity returns, as it inevitably does.

When you look for stocks that are undervalued, it’s best to focus on shares of quality companies that have a consistent history of sales and earnings, as well as a strong hold on a growing clientele.

High-quality value stocks like these are difficult to find, even when the markets are down. But when you know what stocks to look for, you can discover them. Here are three of the financial ratios we use to spot them:

  • Price-earnings ratios
  • Price-to-sales ratios
  • Price-cash flow ratios

Above all, use our three-part Successful Investor approach to develop a profitable long-term investment strategy

  1. Hold mostly high-quality, dividend-paying stocks.
  2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
  3. Downplay or stay out of stocks in the broker/media limelight.

Many millennials are looking at real estate as the best option for a successful long-term investing strategy. What are your thoughts?


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