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Building wealth typically doesn’t happen overnight. It requires diligence, planning and time. Adopting a long-term approach to investing can be prudent for many individuals looking to grow their wealth. However, with so many ways to implement a long-term investment strategy, it’s important to take a step back and consider the many tactics and approaches for building long-term wealth.
A financial advisor can help you create a long-term investment strategy to achieve your financial goals.
What Is Long-Term Investing?
Long-term investing is a strategy that involves buying and holding assets for an extended period, typically years or even decades. The aim is to build wealth over time.
This approach stands in contrast to short-term trading. This is where investors buy and sell assets quickly, often within days or weeks, to profit from short-term price fluctuations.
Long-term investing is rooted in the principle of compound interest. Compounding occurs when the returns generated by your investments are reinvested.
This allows your initial capital to grow exponentially over time. In essence, you earn returns not only on your original investment but also on the returns themselves.
Additionally, there are tax advantages for long-term investments. That’s because the gains from investments held for at least one year are taxed at a lower rate than short-term gains. It proves beneficial for patient investors with longer time horizons.
Long-Term Investing Strategies
Whether you’re just starting your investment journey or looking to fine-tune your approach, these 10 long-term investing strategies and tactics can help you achieve long-term investment success.
1. Get an Early Start
Time is one of the most powerful investment tools. The earlier you begin saving, the more time your investments have to grow, thanks to compound interest.
For example, a college graduate who begins investing in their 401(k) at age 22 will need to save under $400 per month to have $1 million by age 62, assuming a 7% average annual return. Meanwhile, someone who starts investing in a 401(k) at age 42 would need to save nearly $2,000 a month to have roughly the same amount by age 62.
Therefore, it’s important not to procrastinate, so start investing as soon as you can.
2. Diversify With Asset Allocation
Diversification is a fundamental strategy in investing, with asset allocation serving as one way to build a balanced portfolio.
Asset allocation involves diversifying your investments across various asset classes, including stocks, bonds and cash. In essence, you avoid putting all your financial eggs in one basket.
Remember, diversification can dilute risk, but it doesn’t grant immunity against losses.
SmartAsset’s asset allocation calculator can help you identify an investment mix that is right for your risk tolerance.
3. Manage Taxes With Asset Location
Asset allocation is different from asset location:
- Asset allocation. This refers to your strategic mix of investments in different asset classes.
- Asset location. Asset location is about where you hold those investments. It refers to the deliberate placement of specific types of investments in taxable, tax-deferred and Roth accounts. The primary goal is to lower the overall tax liability for your investments while maximizing your after-tax returns.
Generally, long-term investments that generate higher taxes, such as bonds and actively managed funds, work better in tax-advantaged accounts. This shields their returns from immediate taxation.
Conversely, investments with more favorable tax treatment, such as stocks with long-term growth potential, can be held in taxable accounts. This takes advantage of lower tax rates and allows for tax-loss harvesting opportunities.
4. Buy and Hold
The buy-and-hold mantra encourages holding onto stocks for the long haul, ignoring short-term market fluctuations. It’s a long-term strategy that minimizes trading costs and taxes while benefiting from the market’s long-term growth.
But remember, markets are unpredictable. Returns aren’t guaranteed, and losses are possible. However, the longer your money is invested, the more time it has to compound, potentially leading to substantial gains.
5. Don’t Try to Time the Markets
Continuing in the same vein of unpredictability, predicting stock price movements – or timing the market – is a risky strategy.
Not only do you have to accurately forecast the right time to sell an investment or exit the market, but you must also know the best time to buy back in. Doing so consistently is all but impossible for the everyday investor.
Instead of trying to time the market, consider investing a fixed amount at regular intervals, regardless of market conditions. This approach, known as dollar-cost averaging, reduces the impact of market volatility, potentially leading to more consistent long-term returns.
6. Buy Index Funds or ETFs
Index funds and exchange-traded funds (ETFs) are popular choices for long-term investors.
These funds aim to replicate the returns of a specific market index, like the S&P 500. They offer broad diversification at a low cost, making them an excellent choice for passive investors.
Just keep in mind that performance can vary, and every fund has its own set of risks.
7. Buy a Target Date Fund
Target date funds are portfolios designed to align with your retirement date.
These funds are a set-and-forget option that simplifies long-term investing. They automatically modify their mix of investments to become more conservative as you approach retirement.
8. Invest for Growth
If your financial goals are years away, consider an aggressive growth strategy.
Invest in assets with the potential for higher returns, like growth stocks. While these investments come with higher risk and potential volatility, they can also offer greater rewards over the long run.
9. Invest for Income
Income investing is ideal if you’re looking for regular cash flow, such as during retirement. Assets like dividend-paying stocks or bonds can provide a steady stream of retirement income to cover your expenses.
Instead of taking your dividends as cash, consider reinvesting them. Doing so can significantly boost your long-term returns through compounding.
10. Adjust and Rebalance
Your financial goals and situation may change over time. Rebalancing ensures your asset allocation remains on track, even as different investments perform at different rates.
Periodically review and adjust your investment portfolio to stay aligned with your objectives.
Common Long-Term Investing Mistakes to Avoid
Knowing the right strategies is one part of long-term investing. Staying the course when conditions complicate those strategies is the other part, and it is where most investors run into trouble.
These investing mistakes most commonly derail long-term wealth building.
Selling During Market Downturns
Market downturns occur regularly. A portfolio that has been growing for years can lose a significant portion of its value in a matter of weeks, and the experience can be genuinely stressful.
The instinct to sell and stop the bleeding is understandable. However, acting on it locks in losses and removes money from the market before a recovery can offset the damage. Investors who sell during downturns then face a second decision: when to get back in.
Getting both of those calls right consistently is not realistic, and the cost of getting them wrong compounds over time.
Over-Concentrating in a Single Stock or Sector
A large position in a single company or industry can feel like confidence in a thesis, but it carries the risk of losses that diversification would otherwise limit. Even businesses with strong competitive advantages can face unforeseen regulatory changes, management failures or disruptions.
A diversified portfolio weathers those events better than one concentrated in a single bet.
Keeping Contribution Rates Flat as Income Grows
Starting early is a genuine advantage, but only if the amount being saved keeps pace with earnings over time.
An investor who sets a fixed monthly contribution in their twenties and never adjusts it may find that the original amount represents a shrinking share of their income and falls short of how much they should save to meet their long-term goals.
Revisiting contribution rates after a raise, promotion or significant change in income is as important as the initial decision to start investing.
Overlooking Fees
Investment fees do not disappear in good years and will reduce returns, regardless of market conditions.
The difference between a fund with a 0.05% expense ratio and one with a 1.00% expense ratio may seem minor in any given year. However, over decades, the gap in final value becomes substantial.
Reviewing the expense ratios of every fund and switching to lower-cost alternatives are among the few ways to improve long-term returns without taking on additional risk.
Letting the Portfolio Drift
Asset allocation targets are only meaningful if you maintain them.
When one part of a portfolio grows faster than others, the original balance shifts. What started as a diversified mix can quietly become a concentrated one. An investor who set a target allocation years ago and does not rebalance may be carrying significantly more risk than they intended - often without realizing it until a correction reveals it.
Periodic rebalancing keeps the portfolio aligned with the original plan and the investor’s actual risk tolerance.
Bottom Line
Long-term investing requires a disciplined approach and a well-constructed plan. From getting an early start to adjusting and rebalancing your portfolio, these 10 strategies can provide a comprehensive framework for building wealth over time.
Investing Tips
- A financial advisor can help you select investments and manage your portfolio according to your goals. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Contributing to a 401(k) is one way to invest for the long term. Not only do 401(k) contributions help fund your eventual retirement, they also provide a tax benefit. SmartAsset’s 401(k) calculator can help you estimate how much your nest egg could be worth by the time you enter your golden years.
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