4 Rules for Successful Long-Term Investment Growth
Investment growth takes time. Have patience and follow the rules.
Investing for growth involves purchasing something that will appreciate in value. Real estate and stocks are the most common forms of growth investments. No matter what your age, part of your portfolio should be allocated toward investment growth. For those within 10 years of retirement, rules of thumb suggest somewhere between 60% – 80% of your portfolio.
There are many guidelines you can follow when investing for growth. Each investor has different goals, and a different approach to investing; each investor will, therefore, have different rules or guidelines that they follow to try to achieve those goals.
However many rules an investor follows or adheres to, there are four that should remain as staples across all strategies. Invest in the long-term, don't speculate, diversify, stick with what you know and like.
Investing for Growth: Long-Term
There are different definitions for long and short term—for investing purposes, long-term can mean more than a year. However, when you purchase an investment instrument for the purpose of investment growth, you should plan on owning it for a minimum of 10 years.
Statistics tell us that 70% of the time the stock market will have a positive calendar year return; 30% of the time it will be negative. What this means is that year over year, there will be a general rise in the value of stocks. A quick look at the Nasdaq Composite, over its lifetime, shows a generally rising trend—even after a recession.
Index funds, such as the Schwab S&P 500 Index Fund, which owns shares of most of the stocks listed in the S&P 500 Index, are a good investment for the long-term. Stocks that have been listed in an index have been chosen by the index managers based on their performance over time.
The key to long-term investing is to own the investment for a long time. You might expect three or four years out of 10 to have negative returns. They might happen the very first year you invest, or right before you were going to cash them in.
Picking long-term investments might mean weathering market shrinkage—that's just the way the stock market works. Stay invested, and the investment growth that occurs in the growth years will outweigh what happens in the negative years.
Purchasing an individual stock may not be the best approach for long-term investing. An individual stock may do even better than the market as a whole, or it may do much worse. Companies can fail by themselves or during a market crash. Others perform exceptionally well during up and downswings of the market. Find and invest in companies that are structured to endure ups and downs—better yet, find some that have.
People lose money in the markets every day. Why? Because many "investors" are speculating, not investing.
Speculators try to time the markets to make a quick profit. They may win big, or they may lose big. If this sounds similar to gambling, it's because it is. This should not be the strategy to take with your retirement or family savings. Investment growth does not occur from speculation; it occurs from buying an asset that will appreciate in value over time.
Speculating is the hope of gains, with a high risk of capital.
Stocks aren't the only place people speculate. Speculation occurs in real estate also. You can try to flip a home quickly and make a quick buck, or you can invest for the long haul. Speculating always has more risk—for inexperienced investors who aren't skilled at evaluating risk as it relates to an overall portfolio, the results can be detrimental to long-term wealth.
Take the time to learn how the investment will grow. This means you must understand what you own. One method is to classify investments on a risk scale of one-to-five. Speculative investments are a "five" and ultra-safe investments are a "one". Ranking choices on this scale can help you see how much risk you are taking.
If you put your assets in a single stock, or a single piece of property, you might as well go to Vegas. Again, this is akin to gambling.
Long-term investment growth is achieved by setting up a disciplined approach to invest systematically across stocks, bonds, real estate, or others in a diversified way. Diversifying means owning different types of investments that are geared towards different market situations.
Portfolio diversity is important to long-term investing. Designed properly, a portfolio can net you gains in all cycles of the market.
You want to own investments that don't tumble when there are rumors abounding about the market and economy. If you are diversifying and investing long-term, you are following the Modern Portfolio Theory, which has been widely adopted by investors.
If you’re investing in stocks, use index funds so your money is spread out across thousands of stocks. If you’re buying real estate, plan to buy multiple smaller, affordable investment properties, rather than putting all your money into one large piece of property.
You can achieve long-term investment growth if you are patient, thoughtful, avoid the temptation to speculate, and diversify your investments.
Stick With What You Know
In 2017 and early 2018, as Bitcoin rose in value, inexperienced investors saw an opportunity to make a lot of money quickly. Some even took out a second mortgage on their home to invest. Not long into 2018, the value of a Bitcoin had dropped from $20,000 to $8,000. People who followed this hype found themselves on the losing side of a gamble, much deeper in debt.
Invest in markets that you can follow, which are familiar to you. This is a much safer approach than investing in next great thing your neighbor told you about over the fence.
Not many people can become experts in all markets and all methods of investing. Choose a few long-term markets and investment types you can keep yourself informed on, and stick with them. Learn more as you go, but try not to get sucked into hyped investments that you are not familiar with, or that sound too good to be true.
Unless you have a lot of experience in the investment markets, work with somebody to help you invest your family's financial nest egg. A rule of thumb for many investors is to invest no more than 10% of their income. If you want to have a little fun as a speculator, consider using significantly less than this, and try not to tap into your emergency funds, retirement, or savings.
Federal Reserve Bank of St. Louis. "NASDAQ Composite Index." Click "Max". Accessed Apr. 14, 2020.