4 tips to build an investment strategy for the long term

Adopting a long-term approach to investing is a great way to meet your future financial goals, whether that is saving for your kids' college tuition or your own retirement.

While it may seem like you need to move fast to take advantage of the stock market's ups and downs, as it turns out, "long-term stock investments tend to outperform shorter-term trades by investors attempting to time the market," said Investopedia. Further, "investing long term cuts down on costs and allows you to compound any earnings you receive from dividends."

But how can you set up a long-term investing strategy that continues to serve you for years to come? Here are some tips to keep in mind.

Subscribe to The Week

Escape your echo chamber. Get the facts behind the news, plus analysis from multiple perspectives.

SUBSCRIBE & SAVE

Sign up for The Week's Free Newsletters

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

Sign up

1. Pick a strategy you can stick with

"A proven formula for long-term investment success is having a target asset allocation framework and sticking with it through market ups and downs," Jim Gubitosi, the co-chief investment officer at Income Research + Management, said to U.S. News & World Report. 'Asset allocation' refers to the "proportion of stocks to bonds and other assets in your portfolio."

To figure out an investment mix that is appropriate for you, it helps to figure out what your investment goals are, when you would like to reach those goals by, and what your appetite for investment risk is. For instance, for an investment timeline of five to 15 years, you might opt for a conservative approach "of 50% to 60% in stocks and the rest in bonds," whereas if you have a longer timeline and are comfortable taking a more aggressive approach, you could "go up to 85% to 90% stocks," Stacy Francis, the president and CEO of Francis Financial in New York City, said to Forbes.

Once you have determined your ideal mix, you will want to put on blinders to market volatility and any nerves that come up around it. Instead, stick to the strategy you have already determined makes sense for your investing needs.

2. Make sure to diversify

Diversification is another key to "successful long-term investing," said Forbes. By "spreading your portfolio across a variety of assets," you will "hedge your bets and boost the odds you're holding a winner at any given time over your long investing timeframe."

You will want to diversify between different types of investments (think stocks as well as bonds and cash), but also "across sectors, factors and geographies," said U.S. News & World Report. 

3. Pay attention to costs

While buy-and-hold strategy will mitigate the transaction fees you will pay with more frequent trades, there are still potential costs associated with a long-term approach to investing. For one, "when it comes to investing in mutual funds and ETFs, you have to pay an annual expense ratio, which is what it costs to run a fund each year," said Forbes. Another charge you may incur is financial advisory fees "if you receive advice on your financial and investment decisions."

Since any investment-related costs you pay will ultimately eat into your total returns, it is worthwhile to stay mindful of these costs when investing. Even a seemingly nominal fee can have a surprisingly large impact — "assuming a 4% annual return, paying 1% in annual fees leaves you with almost $30,000 less than if you’d kept your costs down to 0.25% in annual fees," said Forbes, citing an example for the U.S. Securities and Exchange Commission.

4. Keep your eye on the big picture

Given how easy it can be to "panic over an investment's short-term movements, it's better to track its big-picture trajectory," said Investopedia. Similarly, while "large short-term profits" can seem tempting, "long-term investing is essential to greater success" — and it also involves less risk than short-term trading.

So when market noise starts to get into your ear, remember that it's not relevant to your goals: "If you're investing for the long term, the daily or even yearly, ups and downs in the market don't matter," said U.S. News & World Report. Instead, "the real enemy of long-term investors is themselves and the inclination to get in and out of the market."