How to become a successful long term investor

Long-term investments are considered to be best done in stocks. This is partly due to the fact that equities sometimes lose 10% to 20% or more of their value in a short period of time. Investors have the potential to ride out some of these highs and lows over many years, if not decades, to earn a superior long-term return.

The inclination to be emotional is one of the weaknesses in investor behaviour. Many people profess to be long-term investors until the stock market starts to collapse, at which point they withdraw money for fear of more losses.

Let us look into how one can become a successful long term investor –

Choose where you want to invest

There are various alternatives available: 

Stocks by themselves: Individual stocks can be purchased if and only if you have the time and willingness to properly research and assess stocks on a regular basis. If this is the case, we strongly advise you to do so. It is proven that wise and most importantly patient investors can outperform the market over time. There’s nothing wrong with choosing a more passive strategy however if heavy quantitative analysis is not your cup of tea. 

Index funds: You can invest in index funds, which track a stock index such as the S&P 500, in addition to buying individual stocks. When it comes to actively managed funds versus passively managed funds, we prefer the latter (although there are certainly exceptions). Index funds have two advantages – they have lesser fees, and  and almost always shadow the long-term performance of their underlying indexes. The S&P 500 has provided total returns of around 10% annually over time, and such performance can build significant wealth over time.

Robo-advisors: Last but not least, the robo-advisor has risen in popularity in recent years. A robo-advisor is a pseudo-stockbroker that invests money on your behalf in an index fund portfolio that has been customised according to your age, risk tolerance, and objectives. A robo-advisor can not only choose your investments, but many will also maximise your tax efficiency and make changes automatically over time.

Decide how much to invest 

The best way to answer this question is by elimination i.e by understanding what money you shouldn’t put into stocks.Don’t put money you could need in the next 5 years as a general rule of thumb. While the stock market will almost likely increase in the long run, there is just too much volatility in stock prices in the near term — a decrease of 20% in a single year is not uncommon. During the COVID-19 pandemic in 2020, the stock market plummeted by more than 40% before rebounding to an all-time high in a matter of months.

Major Pointers to Remember

Diversify your investment portfolio.Invest exclusively in companies that you are familiar with.Until you’ve gotten the hang of investing, stay away from high-volatility equities.Avoid penny stocks at all costs.Learn how to evaluate stocks using basic measurements and concepts.

It’s a good idea to understand the concept of diversification, which means that your portfolio should include a number of various types of companies. However, I would advise against over-diversification. Stick to industries you’re familiar with, and if you discover you’re good at (or comfortable with) appraising a specific type of stock, there’s nothing wrong with that area accounting for a sizable portion of your portfolio.

Buying in demand & high-growth stocks may appear to be a terrific (and easy!) method to gain wealth (and it can be for some), it is advisable to wait until you’re a little more experienced before doing so. Like all other things in life building a solid foundation (through well-established companies) is the winning strategy. 

If you wish to invest in individual stocks, you need learn how to evaluate them using some of the most fundamental methods. A good place to start is by learning about value investing. We can assist you in locating stocks with good valuations. This is the path to go down if you want to add some exciting long-term growth prospects to your portfolio.

Keep Investing 

Warren Buffett, the Oracle of Omaha, reveals one of the most important investment secrets. (Note: Warren Buffett is not only the world’s most successful long-term investor but also one of the best sources of investment advice.)

Buying shares of terrific businesses at affordable prices and holding them for as long as the businesses remain great is the most guaranteed strategy to make money in the stock market (or until you need the money). You’ll have some volatility along the way if you do this, but you’ll end up with fantastic investment returns in the long run.
If you wish to learn more about the art of long-term investing, check out this course by FinLearn Academy on The Art of Stock Picking and Long Term Investing. You will be able to learn the basics and master it with the advanced framework strategies.