10 Long-Term Investing Strategies That Work
A quote attributed to Titus Maccius Plautus, a Roman comic playwright, has relevance for today's investors: "In everything the middle course is best: All things in excess bring trouble to men." Balance serves as the ideal goal for long-term investing. Needs change over time, and shortcut strategies that may work one year can prove ineffective, and even costly, the next.
U.S. News asked experts to weigh in on some of the soundest investing strategies to use throughout your life. Here's a look at 10 of the best long-term investment strategies:
Start early.
Asset allocation + consistency = Success.
Understand your risk profile.
Automate.
Diversification, diversification, diversification.
Don't get emotional.
Use a Roth IRA.
Don't forget taxes.
Keep costs low with index investing.
Avoid get rich quick investments.
Start Early
The first and arguably most important tenet of long-term investing is to start early. The more time you give your investments to grow, the larger they can become.
Time is so powerful, in fact, that waiting an extra 10 years to start investing – from 25 years of age to 35 years of age – could cut your long-term returns in half. What's more: When you start investing is even more important than how long you invest. Someone who invests $200 per month from age 25 to age 35 could have almost $300,000 at age 65 with a 7% average annual return. If that same person waited until age 35 to invest $200 per month, but kept investing all the way until she was 65, she would end up with only $245,000 by age 65.
And remember: You don't need to wait until you "have the money" to get started. "Every dollar invested over time will start adding up, and you will see the magic of compounded growth over time," says Jennifer Kim, managing senior partner at Signature Estate & Investment Advisors.
Asset Allocation + Consistency = Success
While time is perhaps the single most important ingredient to long-term investing success, it works best when paired with proper asset allocation and consistency.
If you wanted to turn long-term investing strategies into a recipe, Kim says the three ingredients would be time, asset allocation and investing monthly.
Asset allocation is the proportion of stocks to bonds and other assets in your portfolio. It should align with your time horizon, risk tolerance and investment goals. Someone with a longer time horizon and higher risk tolerance who is looking for long-term growth may use more stocks. Meanwhile, a more conservative investor with a shorter time horizon could lean more heavily on bonds.
Investing monthly through dollar-cost averaging is another key ingredient, Kim says. Dollar-cost averaging involves purchasing the same dollar amount of securities each month regardless of market price. "(This) will allow more securities to be purchased during a dip at lower prices, helping the portfolio to grow even more in the long term," she says.
Understand Your Risk Profile
Understanding your risk profile is essential but can be easier said than done. Often, the best way to determine how risk averse you are is through experience or trial and error. If a 5% drop in your portfolio's value makes you lose sleep at night, you're probably a conservative investor.
It's also important to understand how risk relates to long-term returns and your ability to achieve your financial goals.
"For instance, we see situations where someone has started saving early but is invested in a very conservative portfolio, not understanding that even though risky assets like equities for stocks have greater volatility, in the short term, a diversified equity portfolio should have greater returns over the long term," says Ryan Patterson, chief investment officer at Linscomb Wealth.
Your risk profile – much like your tolerance for roller coasters – will also change throughout your life. "Someone nearing or in retirement likely shouldn’t have a risk profile that looks similar to when they were in their 20s or 30s," Patterson says.
Automate
To help achieve the consistency element in Kim's successful long-term investing formula, she recommends automating your contributions.
"Setting up a monthly investment plan can actually help the investor become an automated millionaire over time," she says. This is why 401(k)s automatically swipe money from your paychecks to fund your retirement.
"Many investors find it very difficult to save a large amount at retirement," she says. "However, if they could just take a small percentage out of their paycheck into their 401(k), over time, they will be able to accumulate a large fortune when they retire from their job."
You can also automate your investments into other brokerage accounts. Many firms will let you set an investment schedule and pull money from a linked bank account to add to your portfolio.
Diversification, Diversification, Diversification
You've likely heard the real estate axiom that it's all about "location, location, location." Well, for long-term investors, it's all about "diversification, diversification, diversification."
"The best way to grow an investment portfolio is twofold: Own great investments, and mitigate losses through diversification," says Stephanie Williams, senior wealth advisor at AlphaCore Wealth Advisory.
To achieve proper diversification, you may need to venture beyond the familiar.
"For decades, investors could rely on stocks and bonds to provide diversification, but this has been less true in recent years," Williams says. "In 2022, we saw both asset classes decline substantially at the same time."
She says true portfolio diversification requires three components: equities, fixed income and alternative investments.
"By incorporating additional asset classes – such as private real estate, private credit and private equity – you can bring down your overall portfolio volatility and potentially compound at a higher rate over time," she says.
Don't forget to diversify geographically too. Holding investments based outside of your home country is key to avoid home country bias. It'll also mitigate the risk of a domestic recession wiping out your portfolio.
Don't Get Emotional
Emotions are an innate part of the human experience. But they're best kept away from your investment decisions.
The enemy of long-term investors isn't market volatility – if you're investing for the long term, daily or even yearly, ups and downs in the market don't matter. The real enemy of long-term investors is themselves and the inclination to get in and out of the market.
It’s important to remember that "long-term investing strategies are based on sticking to the strategy over the entire period, regardless of how you feel about the economy, fiscal policy or political environment," Patterson says. "Instead of trying to time tops and bottoms of investment cycles, it is better to stick to a periodic investing strategy over the long term."
Over the long term, markets always trend up. The only surefire way to participate in all the growth the market has to offer is to stay invested even during the worst of times because they're often followed by the best of times.
Use a Roth IRA
A Roth IRA is one of the best long-term investing vehicles, according to Kim, "the reason being that it grows tax-free for the rest of your life."
You contribute after-tax dollars into a Roth IRA in exchange for the ability to withdraw money tax-free in retirement. It's one of the few pies Uncle Sam won't try to dip his finger into – unless you try to dip yours in early by withdrawing before retirement. This may incur taxes and a penalty, depending on your distribution and circumstances.
Roth IRAs are also not subject to required minimum distributions, which are distributions investors must start taking from traditional, or pretax, retirement accounts at age 73.
This can prolong the growth in your Roth for an even longer period of time, Kim says.
Note that not everyone qualifies for a Roth IRA. The IRS limits who can contribute and how much they can save based on income. In 2024, the income phaseout range begins at $146,000 for single filers and $230,000 for married filers.
Don't Forget Taxes
Taxes are often the greatest expense Americans face, says Andy Watts, vice president of planning and growth solutions at Avantax. This is why it's not enough to just have a financial plan; you need a "tax-intelligent financial plan optimized to achieve your goals and minimize your tax burden," he says.
How does one go about doing this? The easiest way is by working with a tax-savvy financial advisor. "Be highly selective in the advisor you choose, as it can have a profound impact on your future," Watts says.
You can also do it yourself by focusing on asset location. In other words, keep your highest tax investments in tax-sheltered accounts, and keep your tax-free investments in taxable accounts.
You'll also want a mix of taxable, tax-deferred and tax-free investments you can pull from at retirement, Watts says.
Keep Costs Low With Index Investing
Taxes aren't the only cost eating into your long-term investment returns. Fees can be another hidden burden. Consider, for example, a $100,000 investment earning 7% per year. With no fees, that account could be worth more than $575,000 in 25 years. But if you were to pay a mere 2% per year in fees, it would be worth less than $350,000.
One surefire way to keep your costs low is to invest in low-cost index funds or exchange-traded funds, called ETFs, that track the performance of a broad market index, such as the S&P 500, says Harry Grand, partner and head of the New York office for Angeles Wealth Management. "This strategy offers instant diversification and tends to outperform most actively managed funds after fees over the long term."
Avoid Get Rich Quick Investments
Now for a long-term investing strategy to avoid: "get rich quick" schemes. Anything that promises to turn you into a millionaire overnight, or guarantees astronomical returns, is best left at the gambling table.
These types of investments can be quite volatile, Kim says. They are also rife with scam and fraud.
So if you're looking for reliable long-term investing strategies, stick to the tried-and-true methods listed above.