Investing is a journey, especially when you decide to put away money for the long term, whether that be to save up for a house, or to bolster your retirement savings (or maybe you’re planning to retire early!).
Before you set out on this journey, you need to plan well, and be prepared for the financial markets to give you a bumpy ride, sometimes you might lose sight of why you’re doing this in the first place.
Because the path isn’t always easy, we put together these 5 tips to ensure you have the best possible outcome in your travels through any long-term investment.
Pick a strategy, and stick with it!
There are hundreds of strategies to choose from when it comes to putting money into the financial market, from value investing, to dollar cost averaging, pick a strategy and see it through.
Fluctuating and constantly switching between trading strategies is dangerously close to trying to time the market, something which you do not want to do. If you have your strategy, you’ll avoid picking and choosing stocks based on criteria you didn’t really decide on.
If you don’t know which strategy is best, the one most recommended for beginners is dollar-cost averaging, especially using a spare change investment app. This will give you exposure to the financial market by investing into a diversified portfolio using an amount of money that isn’t scary to invest at all.
If you have made the decision to invest, start as early as you possibly can, the reason being is because of compounding.
Depending on your investment, you might be paid interest or dividends, these are typically reinvested, drastically increasing your earnings from the investment. Take this graph below, showing an initial investment of $1000 into a product earning 8% per year, then investing 200/month thereafter.
Notice how the investment has generated 3 times as much money as the contributions at the end of 30 years, but the earnings from interest really started to pick up after around 12 years? This is why it’s important to start investing as early as possible, so you have more time to earn that compounded interest.
Invest as much as you can afford
You don’t have to listen to the guru’s telling you to eat baked beans with the lights off to save every cent possible just so you can invest more!
Investing as much as you can afford is the next best thing you can do to ensure your long-term success, it will stop you getting disheartened and losing momentum on your investment. Don’t go crazy and invest so much you can’t afford to live, there are options out there, like the spare change investing apps mentioned earlier, where you can start from as little as five dollars.
Along with investing early, investing a little to start with helps mitigate risk also, which brings us too…
Don’t sweat the bumps
The financial markets are a place of ups and downs, but as the famous saying goes, “time in the market beats timing the market”.
This applies to both investments in stocks and in interest earning products, both can be affected by economic forces which might mean you’ll be earning less. Remember, you’re in this for the long term, so you have time to hold on and wait for the market to correct itself.
Some long term investors consider market downturns the best time to accumulate even more of your chosen investment, and call it “buying the dip”, with the thought that the market will eventually rise again, and your “discounted” invested along with it.
Know your exit
This is an especially important part of your strategy, which is worth emphasizing as another point, plan out your exit and know when it’s time to cash in on your investments.
Whether you plan to live on your investments in retirement, or plan to cash out in 10 years for a house, understand when it’s time to start winding down your investment and take profits.
It’s likely that if done really well, with the yearly interest or dividends, you could only work part-time, or live off it in your retirement. You might even splurge a little more, dollar cost averaging out of your investment, so you can spend more time on nice holidays, or maybe you need to sell it all to buy your first home.
No matter what the reason for investing, know exactly your end plan, this goal is also what will motivate you to keep investing over the years, or even decades!