What makes a good long-term investment strategy?
By Ben Hobson, Markets Editor, Stockopedia
Thanks to social media feeds and 24/7 news cycles, there’s more buzz around stocks and opportunities than ever before. And all that buzz can make it difficult to focus on the long-term.
While it’s true that some investors get lucky with a ’golden’ stock, most successful investors gear their portfolios for the long run. After all, patience is a virtue.
That’s why Ben Hobson, Markets Editor at Stockopedia shares his insights on how to manage your portfolio over the long-term for greater returns.
Depending on the forces shaping the market, investment strategies naturally adapt and evolve over time in response.
As a general rule, the longer your money is invested in a well-balanced portfolio, the harder it’ll work. Having a solid understanding of your financial affairs and knowing what you can safely invest upfront is the best starting point before making any snap decisions.
Remember to factor in lifestyle changes and events which could affect your financial position. It can also be a good idea to set yourself a milestone to reach with your investment before you decide whether to sell; this can help you avoid knee-jerk reactions led by emotion.
Building your custom strategy
Everyone is different – and so are investment strategies. With investment advice coming hard and fast, especially unvetted via social media, it can be tricky to judge your next move.
However, it’s always important to remember that historical drivers of stocks are consistent.
There’s a simple formula that most seasoned investors use, centred around three key points – Quality, Value and Momentum. By making sure your investment choices tick these boxes, you can expect strong performances in the long-term.
When evaluating prospective stocks, using markers like high profitability, strong cash flows and a durable business model are useful. Be wary of low or no profits, thin margins, debt and precarious balance sheets – businesses with these are usually worth avoiding.
Searching for the right stock should be thorough. Trends are a significant performance indicator – looking at its history and spotting signs of positive momentum. Share prices that are rising strongly often continue to do so.
Business sectors, stocks and markets move at their own pace and are often interlinked. Changes in one area can directly affect another. So, think about the role each investment you make plays in your portfolio.
Any investor worth their salt would recommend diversifying investments across a range of investment types to protect against volatility.
Diversification can take many forms. Looking at markets in new international geographies, different industries and varying market-cap sizes, for example, minimises exposure to unnecessary risks and maximises opportunities.
Another example is the type of investment itself. Funds and bonds can be less risky than a volatile stock but, having both could help limit losses and increase the chances of a positive return.
A perfect balance
Once your portfolio is put together, take a moment to prioritise your investments. This way, you’re not worrying over the smallest of market fluctuations.
It’s vital to not get too emotionally invested in your portfolio’s performance. Giving your investments room to breathe is important. A rash decision can leave you missing an uptick in value that could be right around the corner.
There is a common misconception that investors are glued to their investments and capitalising on every fluctuation possible. Unfortunately, this is portrayed as the only viable way to trade all too often.
Overtrading can not only fuel emotional investing, but fees and charges can quickly mount up. Trading fees all chip away at your portfolio, so avoid throwing money at unnecessary trades – especially when you just can’t find anything better to do.
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