We commonly find that our biggest dreams demand substantial financial support to become a reality. For some, obtaining the necessary funds to achieve their goals can seem challenging or overwhelming. However, by following best investment practices and tips, you can secure the funds you need to realize your objectives.
Having utilized my investments to finance personal goals, I’ve compiled my top tips for individuals aiming to attain their own long-term objectives.
Set Investment Goals
Arguably, the most important, if not most obvious, step of any investment journey is establishing and adhering to goals. Before commencing your investment journey, it is essential to strategize and determine the purpose of your savings and the required amount to achieve your financial goals.
Setting objectives aids in planning crucial details, like determining the amount of money needed and the timeline to achieve it. Even if you don’t yet have a concrete idea in mind of what you want to spend your money on, it can still be beneficial to outline the funds you may need in the future.
Some common long-term investment goals to consider include:
- Home Purchase
- Higher Education
Outline Your Investing Timeline
Once you set your investment goals, you must determine how long it will take to meet them. An individual in their twenties, beginning their career, may decide to start investing for retirement and will likely have at least decades to achieve their retirement investment goals.
Conversely, an individual in the later stages of their career aiming for retirement may have a shorter timeframe to save for the same goal. Despite sharing the same objective, both individuals will make different investment decisions based on their individual timelines.
Most long-term goals usually take more than a few years to achieve, so you want to start investing as early as possible to give yourself time to attain your goals. Knowing your timeline will also help with other decisions you need to make, like assessing your risk tolerance, which we will discuss next.
Understand your Risk Tolerance
After establishing a timeline, you need to assess your risk tolerance. Risk tolerance is how much money you are willing to lose based on the kind of investment decisions you make.
Generally, the greater the risk, the higher the reward, but not all investors are willing to accept a greater risk with the chance of losing a substantial sum of money. An investor who begins early and has ample time to achieve their investment goals may afford to be riskier with their strategies compared to one who has less time and must adopt a more conservative approach.
Regardless of your investment timeline, it is always considered a best practice to outline your risk tolerance enabling you to make more informed decisions regarding your investments.
Leverage the Time Value of Money
Understanding the time value of money and compounding interest is essential for long-term investing. The basic concept is that your money today is worth more than your money in the future because of inflation. When your money is invested, you typically accrue interest or dividends from the investments. Reinvesting these earnings allows you to generate additional income.
The longer your funds are invested, the more it will grow. This highlights the importance of starting to invest as early as possible, enabling your money time to grow to meet your goals.
Diversify Your Investments
Spreading your funds over a range of asset classes is essential for successful long-term investing. Investing in a singular asset is an unnecessarily risky investment choice. If you invest exclusively in either stocks or bonds, you expose yourself to the risk of one of them underperforming, leading to a substantial loss in your investment. You can hedge against this kind of risk by investing in multiple assets. If one asset is underperforming, it is likely that another may be overperforming and can balance out the loss of the underperforming asset.
Diversifying your investments across various markets and industry segments is also crucial. This approach safeguards you against the risk associated with economic downturns in specific industries. Furthermore, certain industries are considered more stable than others, which will aid your portfolio in the event of an overall economic downturn or recession.
Set Your Sights on the Long Game
Long-term investing commonly extends over the course of several years, encompassing periods of both bear and bull markets. If you’re investing for the long term, you can’t let the everyday market fluctuations cause you to worry and make hasty decisions that could negatively impact your investments.
Typically, bull markets last longer than bear markets, so making a hasty decision in the short term may hurt you in the long run. You must adopt a long-term perspective and recognize that remaining in the market without making impulsive decisions will prove beneficial in the future.
Review and Rebalance Your Portfolio
Over the years, your goals, risk tolerance, or asset allocation may change and require adjustments. It is always considered a best practice to review your investments and periodically make adjustments to ensure you are on the right path to achieving your goals.
On a more regular basis, you should review your portfolio and rebalance your asset allocations to ensure they are aligned with your strategies. Furthermore, your circumstances may have changed since the inception of your long-term investment journey, prompting the need for adjustments to your investment timeline or the anticipated amount of money you require. Even if no changes have occurred, it is also a good idea to keep an eye on your investments to ensure you are still on the right path to achieving your investment goals.
Long-term investing does not need to be challenging. Instead, it can serve as a means to fund your goals and aspirations. Following these best practices can simplify and enhance the success of your long-term investment journey.