A quote attributed to Titus Maccius Plautus, a Roman comic playwright, has relevance for today’s investors: “In everything the middle course is best: All things in excess bring trouble to men.” Balance serves as the ideal goal for long-term investing. Needs change over time, and shortcut strategies that may work one year can prove ineffective, and even costly, the next.
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U.S. News asked experts to weigh in on some of the soundest investing strategies to use throughout your life. Here’s a look at 10 of the best long-term investment strategies:
— Start early.
— Diversify far and wide.
— Stay invested.
— Stick to your target asset allocation framework.
— Be the Goldilocks of cash.
— Don’t forget taxes.
— Keep costs low with index investing.
— Diversify your income streams.
— Revisit your strategic allocation to fixed income.
— Consider the aggravation adjusted rate of return.
Start Early
“A widely accepted strategy for investing is getting started as early as possible,” says Ryan Burke, general manager of Invest at M1, and it’s widely accepted for good reason. The earlier you start investing, the more time your money will have to benefit from the power of compounding.
Compounding is so powerful that simply waiting an extra 10 years to start investing — from 25 years of age to 35 years of age — could cut your long-term returns in half. What’s more: When you start investing is even more important than how long you invest. Someone who invests $200 per month from age 25 to age 35 could have almost $300,000 at age 65 with a 7% average annual return. If that same person waited until age 35 to invest $200 per month, but kept investing all the way until she was 65, they would end up with only $245,000 by age 65.
And remember: You don’t need to wait until you “have the money” to get started, Burke says. “Even if you can only invest $50 a month at 18 years old, consistently investing for the long term could create a large nest egg for the future.”
Diversify Far and Wide
“I cannot emphasize enough the importance of maintaining a diverse portfolio and focusing on your individual goals rather than attempting to outperform the market,” says Chris Dhanraj, managing principal of investments at accounting, wealth advisory and consulting firm CliftonLarsonAllen. Sector concentrations can be a boon if you guess right with rallies like the artificial intelligence and tech rally, but they can also be a burden if you guess wrong, such as by investing in regional banks this year.
“Importantly, the focus on diversification serves the dual role of mitigating volatility and emotional stress, as well as increasing the likelihood of achieving your goals,” he says.
To achieve proper diversification, spread your portfolio across sectors, factors and geographies. Diversifying across geographies means holding investments based outside of the U.S.
“Global portfolios are important as they mitigate home country bias, whereby investors forego a diversification benefit because they are more comfortable with companies based in their own country,” says Katie Nixon, chief investment officer at Northern Trust Wealth Management. Taking a global view with your investments gives you the most broad-based, efficient market strategy. She recommends starting with the All Country World Index (ACWI), “as it is the most efficient global portfolio.”
Stay Invested
The enemy of long-term investors isn’t market volatility — if you’re investing for the long term, the daily or even yearly, ups and downs in the market don’t matter. The real enemy of long-term investors is themselves and the inclination to get in and out of the market.
“One of the first things we tell our clients is to ensure they are staying invested rather than trying to time when it’s the ‘right time’ to invest,” says Nancy Curtin, chief investment officer at AlTi Global, a worldwide multifamily office that provides wealth and asset management advisory services to ultra high-net-worth clients. “Doing so allows one to participate in the unexpected days that provide the lion’s share of performance.”
Over the long term, markets always trend up. The only surefire way to participate in all the growth the market has to offer is to stay invested even during the worst of times because they’re often followed by the best of times.
Stick to Your Target Asset Allocation Framework
“A proven formula for long-term investment success is having a target asset allocation framework and sticking with it through market ups and downs,” says Jim Gubitosi, co-chief investment officer at Income Research + Management.
“Markets can act irrationally and have major, unexplained swings, so keeping calm when markets aren’t is a key for any investor,” he says. To accomplish this, you need to have a target asset allocation, or proportion of stocks to bonds and other assets, in your portfolio.
“Having a good understanding of your time horizon, liquidity needs and overall risk tolerance will help you set the right asset mix for your situation,” he says. Then stick to it, and “don’t make snap decisions to buy or sell based on short-term feelings.”
Be the Goldilocks of Cash
No one knows what the market will do, so instead of trying to predict what will happen, Nixon says to prepare by setting aside a reserve of cash and high quality shorter duration bonds that you can tap in times of market stress to fund your financial goals and lifestyle.
“Having this portfolio buffer allows investors to stay the course with their risk asset portfolios, allowing time for equity values to recover, for example,” she says.
However, having too much of a buffer can do more harm than good. “While cash can work well in the short term for financial planning needs and provide safety amid market volatility, too much cash can be a drag on your portfolio,” Dhanraj says.
This year’s interest rate increases may make cash and cashlike positions, such as Treasury bills and money market funds, seem like an appealing way to earn a decent yield while protecting your principal, but such “safe” investments simply cannot provide the return long-term investors need to keep up with inflation, which can erode long-term purchasing power.
“It is important for investors to understand the difference between operating cash and cash as an investment,” says Kristen Bitterly, head of North America Investments at Citi Global Wealth.
Operating cash is what you need to cover your expenses for the next six to 12 months. “Cash as an investment is taking a view in terms of a percentage allocation in your portfolio that this asset will meet your long-term objectives,” she says. There are better options for that latter bucket than straight cash for locking in attractive long-term yields, she says, such as investing in “unstoppable” long-term trends such as digitization, artificial intelligence and the energy transition.
If you want something more stable than these trends, Dhanraj says to look for tax-efficient options like municipal bonds, dividend-yielding stocks and income-producing real estate that also have the potential to deliver increased returns over more traditional cashlike positions.
To combat inflation — which is something that long-term investors need to mitigate in all environments — Nixon says to consider adding Treasury Inflation-Protected Securities, or TIPS, which adjust their principal to match inflation, and natural resource-based equities, which are more sensitive to inflation, to your portfolio. And to keep taxes to a minimum, she says to hold your TIPS in tax-deferred accounts so you don’t pay taxes on the income each year.
Don’t Forget Taxes
Taxes are often the greatest expense Americans face, says Andy Watts, a certified financial planner and vice president of Planning & Growth Solutions at Avantax. This is why it’s not enough to just have a financial plan; you need a “tax-intelligent financial plan optimized to achieve your goals and minimize your tax burden,” he says.
How does one go about doing this? The easiest way is by working with a tax-savvy financial advisor. “Be highly selective in the advisor you choose, as it can have a profound impact on your future,” Watts says.
You can also do it yourself by focusing on asset location. In other words, keep your highest tax investments in tax-sheltered accounts, and keep your tax-free investments in taxable accounts.
You’ll also want a mix of taxable, tax-deferred and tax-free investments you can pull from at retirement, Watts says.
[See: 8 Ways to Minimize Taxes in a Taxable Account.]
Keep Costs Low With Index Investing
Taxes aren’t the only cost eating into your long-term investment returns. Fees can be another hidden burden. Consider, for example, a $100,000 investment earning 7% per year. With no fees, that account could be worth more than $575,000 in 25 years. But if you were to pay a mere 2% per year in fees, it would be worth less than $350,000.
One surefire way to keep your costs low is to invest in low-cost index funds or exchange traded funds, called ETFs, that track the performance of a broad market index, such as the S&P 500, says Harry Grand, head of the New York office for Angeles Wealth Management. “This strategy offers instant diversification and tends to outperform most actively managed funds after fees over the long term.”
Diversify Your Income Streams
While taking taxes into account, you should also look for other ways to diversify your income streams during retirement.
“Long-term investment and retirement planning isn’t just about how much money you have at the time you retire, it’s also about having money that will last through the rest of your life, regardless of how long you live,” says Chris Blunt, president and CEO at F&G. “To plan for the future, investor strategies need to ensure they won’t outlast their money in retirement by ensuring their portfolio has a diverse mix of products that can give reliable returns regardless of the market.”
For example, including insurance products like annuities can protect against longevity risk by providing income for life. “Other types of annuities have features that protect against market downturns and/or can serve as a hedge against inflation,” Blunt says.
There are also insurance products that can provide living benefits you can tap in a health care crisis, he says. “Exploring your options and ensuring you have the right products for your portfolio is key.”
Revisit Your Strategic Allocation to Fixed Income
Here is a long-term strategy that can be executed today: Capitalize on rising yields today by locking them in for the long term.
“The 2022 rise in yields provides an excellent opportunity for investors to revisit their strategic allocation to fixed income as we expect interest rates to remain elevated in the years ahead, creating a unique bull market for bonds,” says Robert Tipp, chief investment strategist at PGIM Fixed Income. “This is in contrast to market expectations for a quick up-and-down rate cycle, allowing those with a longer-term view to potentially see returns in the mid-to-high single digits for an extended period in many fixed-income sectors.”
Consider the Aggravation Adjusted Rate of Return
There are several ways to measure the return on an investment. There’s traditional measures like the basic rate of return or the risk-adjusted rate of return, but “the single most important one is the aggravation adjusted rate of return,” says Miles Nadal, international entrepreneur and investor, and founder and chair of Peerage Capital.
“You must honestly consider whether the people with whom you will have to deal with or the circumstances around the opportunity are worth the aggravation that is attached,” he says.
Nadal says to ask yourself: “Is the juice worth the squeeze?”
“This is especially important when you consider that most ventures will encounter headwinds at some point, often for an extended period,” he says. “If you are going to be patient and stay invested through that time, you must be sure you can manage through the potential aggravation, and the results will justify the sacrifices, and challenges that you encounter.”
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Update 07/31/23: This story was previously published at an earlier date and has been updated with new information.
