Investing for the long-term has a lot of advantages. In general, being a long-term investor produces better financial returns. A well-managed investment portfolio will yield better returns if held over several economic cycles.
In fact, multibillionaire investor Warren Buffet even describes the stock market as “a device for transferring money from the impatient to the patient.”
Another advantage of investing for the long-term is that the tax expense long-term investments will accrue would be smaller. Similarly, the brokers’ commissions and the transaction fees associated with the investment would also be smaller compared to actively-traded investments.
However, despite the many benefits of long-term investments, most people are still hesitant to invest for longer periods of time. For that reason, the following are several tips on how to effectively invest for the long-term.
Choose and stick to a winning investing strategy.
A unique investing strategy is an important element in investing success. Needless to say, there is no one investing strategy that fits the style and needs of all investors. Nevertheless, an effective investing strategy that has stood the test of time is the strategy of investing based on value.
Basically, a value investor looks into the real value of a stock, ignoring the good and bad news about the company. Value investors believe that the stock market overacts to such good and bad news. Thus, they invest based on the company’s book value.
Look for undervalued companies in strong, evergreen industries.
Another effective way of investing for the long-term is by investing in undervalued companies/stocks. If a stock is undervalued, conventional investing wisdom says it will appreciate over time.
Likewise, it is also imperative to invest in evergreen industries – industries which will likely stand the test of time. Some of the most stable industries include food, beverages, clothing and medicine.
Study the company’s annual reports/financial statements.
It is also important that you first study a company’s annual reports and its financial statements before drawing conclusions. Moreover, the best sources of information regarding a company’s financial standing and capacity are the financial statements particularly the balance sheet and the income statement.
Don’t chase a “hot” and/or penny stocks.
Investing in fad industries will most likely spell financial disaster. This was primarily evident during the dotcom boom during the 1990s. Internet companies surged dramatically in the stock market despite the fact that they’re not generating substantial income to stay afloat.
The result is that many Internet companies went bankrupt and millions of dollars were lost in the investment game. When investing for the long-term, it is important to avoid the temptation of fad industries as it will only result to huge financial losses.