How to Invest for the Long Term

October 12, 2021

Investing is a marathon, not a sprint. Here’s how to invest long-term.

When you picture investing, what comes to mind? For most people, it’s the rapid-fire sprint portrayed in Hollywood movies.

The thing is, Hollywood isn’t real life, and investing is not a sprint. It’s a marathon. You only see the magic of compounding over the course of many years.

Of course, there’s a difference between investing in the short-term to realize long-term gains and investing in the long-term for long-term gains. Here’s a look at how to invest long-term.

Long Term vs. Short Term Investing

Short-term investments are assets that can be easily converted into cash or sold within a short period of time. These are defined by easy liquidation, all with the same goal: earning gains in a comparatively short window. Day trading is a textbook example of extremely short investment, and it comes with substantial speculation (and thus more risk).

In other words, short-term investments are all about timing the market, which is when you make assumptions about the price of a security at a certain time in order to maximize your profit.

Long-term investment is all about buying and holding investments, rather than purchasing them with the intention of selling quickly. Generally, that means one to five years, though it can be even longer. This is considered a more conservative strategy than short-term investing.

When is Long-Term Investing the Right Choice?

Since long-term investing is all about holding investments for a long period of time (as in, years), long-term investing is the method of choice if you know you won’t access the funds for an extended period. Common examples include:

  • Retirement more than 20 years away
  • Protection from inflation
  • Planning 7 to 10 years (or more) into the future

Short-term investments are the better choice when you need the money soon (less than 7 to 10 years) or if you want a source of income. Remember, short-term investments are defined by their easy liquidation.

That said, keep in mind that most portfolios use a balanced approach of short-term and long-term investing.

How to Invest Long Term

For most people, a long-term strategy is a good choice. However, it’s not as simple as throwing your money at the market and forgetting about it. You need just as much strategy as a short-term investor, just with a different mindset.

Know Your Timeline

First, you have to know what “long-term” means to you. This is often defined by your investment goal—are you saving for retirement? Putting a kid through college? Paying down your mortgage? Each of these goals demands a different portfolio.

Think about how many years will pass before you need the money. At a minimum, long-term investments run one to five years, but you’re not married to those numbers. If you’re 20 and saving to retire at 70, that’s fifty years for growth.

Basically, the longer you have, the more risk you can afford to take.

Pick a Strategy and Keep It

Once you know your goals and timeline, you’re ready to choose a strategy. Three major long-term strategies are:

  1. Growth investing
  2. Dividend investing
  3. Value investing

Growth investing focuses on companies growing at fast rates that seem poised to maintain that growth. Dividend investing prioritizes dividend stocks, which pay out a percentage of the company’s profits to shareholders each year. Value investing is a tricky art that involves buying stocks of companies that seem undervalued based on competitiveness, revenue, and profit margins.

Keep in mind that some strategies can be implemented together—dividend investing is often associated with value investing, for example. But whatever strategy you choose, you have to stick with it. It sounds simple enough until there’s a market downturn (and accompanying anxiety). When this happens, resist your anxiety. Stay the course.

Don’t Sweat the Small Stuff or Chase Hot Tips

On a related note, don’t sweat the small stuff. Don’t chase hot tips, either. These are both strategies of the short-term investor, and they don’t belong in a long-term growth strategy.

Investments gain and lose value all the time in the short term. Remember, you’re not trying to time the market. It’s more important to track the larger trajectory of the investment than worry about a few cents shaved here or there.

On a similar note, resist the urge to chase a hot tip, no matter the source. You should only trust your own research (or the research of an expert you pay to help you). Otherwise, you’re just giving into buying anxiety when you would be better off staying the course.

Yes, some tips do pan out. But that depends on the reliability of your source, and again, long-term investing is not about a few cents here or there. It’s about long-term growth, and that requires in-depth research and strategic decision-making.

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