5 Underlying Principles for a Long-term Investment Plan

If you are considering how to pay for long-term goals, you should begin saving and investing immediately. Consider the following five strategies for achieving your long-term investment objectives.

1. Align your investments with your objectives

As an investor, you must be aware of your objectives, your timeline for achieving them, and the amount of risk you are willing to take. Five asset classes ranging from “conservative” to “risky” encompass the majority of investments. Cash equivalents (such as money market funds, U.S. Treasury bills, and short-term certificates of deposit (CDs)) are more conservative than equities (stocks). Guaranteed investments (fixed-rate products backed by the claims-paying ability of the issuer), fixed-income investments (bonds and bond funds), and real estate typically fall somewhere in the middle.

2. Spread your ‘eggs’ among multiple baskets

When you place your savings in similar investments, you may expose them to excessive risk or miss out on potential returns. Consider diversification or the distribution of your savings across multiple asset classes. In addition to investing across asset classes, you can diversify by investing within asset classes in multiple subcategories. Please note that asset allocation does not necessarily reduce risk or increase returns.

3. Do not attempt to time the market

Market timing is the process of moving money into and out of stocks in an attempt to capture performance peaks and avoid troughs. Extremely risky, and even the most seasoned investors are thrown off by it. If you sell your stocks during a period of declining prices, you may miss out on future gains. Remember that historically, the stock market has recovered from broad declines, although past performance is not indicative of future results.

4. Set up a purchase plan–and stick with it

In dollar-cost averaging, a fixed dollar amount is invested at regular intervals, regardless of market fluctuations. Dollar-cost averaging is especially advantageous for long-term investment strategies. When you invest in something at a lower price, you receive more units for your money, which can reduce your average cost per unit. And the lower your investment costs, the greater your return potential.

Dollar-cost averaging is utilized when regular contributions are made to an investment and savings account, such as an account in a workplace retirement savings plan. Remember that dollar-cost averaging cannot guarantee a profit or protect against loss. It entails investing continuously in securities regardless of the fluctuating prices of the securities. Consider your ability as an investor to continue participating in dollar-cost averaging during periods of low prices.

5. Monitor your progress regularly

At least once per year, reevaluate your portfolio. Over time, market fluctuations can destabilize your asset allocation. When this occurs, you can transfer funds between investments to maintain the asset allocation you desire in your portfolio.

It is also important to reevaluate your asset allocation whenever your life circumstances change, such as when you receive a raise, get married, have a child, or get divorced. You may ultimately choose to invest with less or more risk.

Whenever you review your asset allocation, ensure that your portfolio is sufficiently diversified to maintain a risk level that is acceptable for both short-term and long-term investing. Diversification helps reduce risk, but there is no assurance that it will prevent income loss.