10 Tips for Successful Long-Term Investing (2024)

While the stock market is riddled with uncertainty, certain tried-and-true principles can help investors boost their chances for long-term success.

Some investors lock in profits by selling their appreciated investments while holding onto underperforming stocks they hope will rebound. But good stocks can climb further, and poor stocks risk zeroing out completely. Below we discuss 10 tips for successful long-term investing that can help you prevent mistakes and hopefully generate some profits.

Key Takeaways

  • The stock market is riddled with uncertainty, but certain tried-and-true principles can help investors boost their chances for long-term success.
  • Some of the more important basic investment advice includes riding winners and selling losers; avoiding the urge to chase "hot tips"; resisting the lure of penny stocks; and picking a strategy and then sticking to it.
  • If your time horizon allows it, a focus on the future with an eye toward long-term investment can maximize profits for almost any investor.

1. Ride a Winner

Peter Lynch famously spoke about "tenbaggers"—investments that increased tenfold in value. He attributed his success to a small number of these stocks in hisportfolio.

But this required the discipline of hanging onto stocks even after they’ve increased by many multiples if he thought there was still significant upside potential. The takeaway: avoid clinging to arbitrary rules, and consider a stock on its own merits.

2. Sell a Loser

There is no guarantee that a stock will rebound after a protracted decline, and it’s important to be realistic about the prospect of poorly performing investments. And even though acknowledging losing stocks can psychologically signal failure, there is no shame in recognizing mistakes and selling off investments to stem further loss.

In both scenarios, it’s critical to judge companies on their merits, to determine whether a price justifies future potential.

Read about Investopedia's 10 Rules of Investing by picking up a copy of our special issue print edition.

3. Don't Sweat the Small Stuff

Rather than panic over an investment’s short-term movements, it’s better to track its big-picture trajectory. Have confidence in an investment’s larger story, and don’t be swayed by short-term volatility.

Don't overemphasize the few cents difference you might save from using alimitversusmarket order. Sure, active traders use minute-to-minute fluctuations to lock in gains. But long-term investors succeed based on periods lasting 20 years or more.

4. Don't Chase a Hot Tip

Regardless of the source, never accept a stock tip as valid. Always do your own analysis of a company before investing your hard-earned money.

Tips do sometimes pan out, depending upon the reliability of the source, but long-term success demands deep-dive research.

5. Pick a Strategy and Stick With It

There are many ways to pick stocks, and it’s important to stick with a single philosophy. Vacillating between different approaches effectively makes you amarket timer, which is dangerous territory.

Consider how noted investor Warren Buffett stuck to his value-oriented strategy and steered clear of the dotcom boom of the late '90s—consequently avoiding major losses when tech startups crashed.

6. Don't Overemphasize the P/E Ratio

Investors often place great importance on price-earnings ratios, but placing too much emphasis on a single metric is ill-advised. P/E ratios are best used in conjunction with other analytical processes.

Therefore a low P/E ratio doesn't necessarily mean a security isundervalued, nor does a high P/E ratio necessarily mean a company isovervalued.

7. Focus on the Future and Keep a Long-Term Perspective

Investing requires making informed decisions based on things that have yet to happen. Past data can indicate things to come, but it’s never guaranteed.

In his 1989 book "One Up onWall Street" Peter Lynch stated: "If I'd bothered to ask myself, 'How can this stock possibly go higher?' I would never have bought Subaru after it already had gone up twentyfold. But I checked thefundamentals, realized that Subaru was still cheap, bought the stock, and made sevenfold after that." It’s important to invest based on future potential versus past performance.

While large short-term profits can often entice market neophytes, long-term investing is essential to greater success. And while short-term active trading can make money, this involves greater risk thanbuy-and-holdstrategies.

8. Be Open-Minded

Many great companies are household names, but many good investments lack brand awareness. Furthermore, thousands of smaller companies have the potential to become the blue-chip names oftomorrow. In fact,small-capstocks have historically shown similar returns totheir large-cap counterparts.

From 2000 to 2023, small-cap stocks in the U.S. returned a compound annual growth rate of 8.59% based on the MSCI World Small Cap Index while the returned 9.66%.

This is not to suggest that you should devote your entire portfolio to small-cap stocks. But there are many great companies beyond those in theDow Jones Industrial Average(DJIA).

9. Resist the Lure of Penny Stocks

Some mistakenly believe there’s less to lose with low-priced stocks. But whether a $5 stock plunges to $0 or a $75 stock does the same, you've lost 100% of your initial investment, so both stocks carry similar downside risk.

In fact, penny stocks are likely riskier than higher-priced stocks because they tend to be less regulated and often see much more volatility.

10. Be Aware of Taxes

Putting taxes above all else can cause investors to make misguided decisions. While tax implications are important, they are secondary to investing and securely growing your money.

While you should strive to minimize tax liability, achieving high returns is the primary goal.

What Is Long-Term Investing?

Long-term investing is generally considered to be three years or more. Holding onto an asset, such as stocks or real estate for more than three years is considered long-term. When individuals sell assets at a profit, capital gains taxes are charged for investments held for longer than one year. Investments held for less than a year are charged taxes at an investor's ordinary income, which is not as favorable as the capital gains tax rate.

What Is the Safest Investment With the Highest Return?

No investment is 100% safe but some are safer than others, and of those, some have higher returns. Such assets include certificates of deposit, high-yield savings accounts, Series I savings bonds, Treasury Bills, and money market funds.

What Are the Cons of Long-Term Investing?

The primary con of long-term investing is its opportunity cost. Funds that are tied up in long-term investments cannot be used for other investments, particularly short-term profitable opportunities. This may not be an issue in the future if the long-term investments bring in enough profit.

The Bottom Line

Investing in stocks never guarantees profits and can be challenging due to the constant fluctuation of the markets, movements in the economy, policy changes, world events, and more. Even with a lot of research, it can be hard to pick a winner or know when a winner becomes a loser and vice versa. Heeding to the above 10 tips can help make you a better investor and hopefully bring in some profits.

As an expert and enthusiast, I can provide information and insights on a wide range of topics, including long-term investing. I have access to a vast amount of information and can provide you with tips and principles to help you succeed in long-term investing.

Principles for Successful Long-Term Investing

  1. Ride a Winner: Holding onto stocks that have shown significant upside potential can lead to long-term success. This principle, famously advocated by investor Peter Lynch, involves avoiding arbitrary rules and considering a stock based on its own merits.

  2. Sell a Loser: It's important to be realistic about poorly performing investments and not cling to the hope of a rebound. Recognizing mistakes and selling off investments to stem further loss is a crucial step in successful long-term investing.

  3. Don't Sweat the Small Stuff: Instead of panicking over short-term movements, it's better to focus on the big-picture trajectory of an investment. Having confidence in an investment's larger story and not being swayed by short-term volatility is key.

  4. Don't Chase a Hot Tip: It's important to conduct your own analysis of a company before investing, rather than relying on stock tips from others. Long-term success in investing requires deep-dive research and informed decision-making.

  5. Pick a Strategy and Stick With It: Consistency is crucial in long-term investing. It's important to choose a single investment philosophy and stick with it, rather than constantly switching between different approaches.

  6. Don't Overemphasize the P/E Ratio: While price-earnings ratios (P/E ratios) are important, placing too much emphasis on a single metric is ill-advised. P/E ratios should be used in conjunction with other analytical processes to make informed investment decisions.

  7. Focus on the Future and Keep a Long-Term Perspective: Investing based on future potential rather than past performance is essential for long-term success. While short-term profits may be enticing, long-term investing is key to achieving greater success.

  8. Be Open-Minded: While many well-known companies are considered safe investments, there are also great investment opportunities beyond those household names. Thousands of smaller companies have the potential to become the blue-chip names of tomorrow. It's important to consider a diverse range of investment options.

  9. Resist the Lure of Penny Stocks: Low-priced stocks, often referred to as penny stocks, may seem less risky, but they can be more volatile and less regulated. It's important to be aware of the risks associated with penny stocks and conduct thorough research before investing.

  10. Be Aware of Taxes: While minimizing tax liability is important, it should not be the primary focus when making investment decisions. The primary goal should be achieving high returns and securely growing your money.

These principles can help investors make informed decisions and increase their chances of long-term success in the stock market. Remember, investing always carries some level of risk, and it's important to do your own research and consult with financial professionals before making any investment decisions.

Let me know if there's anything else I can help you with!

10 Tips for Successful Long-Term Investing (2024)
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