Five Keys to Long-Term Investment Success

Successful long-term investing is pretty boring. Most people think investment success is determined by picking the right stock, the fastest growing sector, the top performing mutual fund or getting into and out of the market at the right time. The financial media often fuels these beliefs with headlines shouting, “Stocks to Buy Now” or “Money Moves for the New Year”. Their goal is to make investing exciting so that their stories attract eyeballs, clicks, viewers or readers. The truth is that prudent long-term investing is not very exciting. That is why you don't hear about it as often as you should. Here are five things that I think are most important to long-term investment success.

Have a plan – How does the saying go? “If you fail to plan you plan to fail.” Your plan should answer some basic questions such as why you are investing (i.e. for retirement or college). How long do you have (your time horizon)? How much risk are you willing to take? Other things to consider are what type of investments will you use and what strategy will you follow. Creating an investment plan to fit your needs and risk tolerance will provide a foundation for your investment decisions and serve as a valuable reminder when markets are turbulent.

Get the right asset allocation - The most important decision you make in investing is setting your asset allocation. Your choice of how much you put in stocks, bonds and cash will have the biggest impact on your investment outcome. Many people collect different investments over their lifetime and sort of back into an asset allocation. Being intentional about choosing an appropriate asset allocation and then selecting investments to fit into your framework is the way to go.

Diversify your holdings – Don’t put all of your eggs in one basket. That is the idea behind diversification. You face many different types of risk when investing. Some of these, such as the risk specific to one company, industry, or country, can be reduced through diversification. Diversification does not eliminate all risk, but it does reduce several types of risk. Why not use it to your benefit. Your stocks investments should be spread across U.S. and non-U.S. companies, different size companies, various sectors, styles and industries. Bond investments should have different maturities, credit quality and various bond types. Today’s low-cost mutual funds and ETFs make it easier than ever to diversify your portfolio across thousands of securities. Take advantage of them.

Reduce expenses – There is one sure thing in investing. Fees. The financial services industry is full of them and it does a great job of disguising them from the average investor. Many people will spend significantly more time researching a dishwasher purchase than they will understanding the thousands of dollars they are potentially paying in annual investment costs. It is not uncommon for a $1 million dollar account to be paying over $10,000 in fees annually. Take the time to understand the fees that you are paying. Lowering your investment costs is one sure-fire way to increase your long-term investment returns.

Stay the course – This is the most difficult of the five steps because investing is emotionally hard. As humans, we are not wired to make good investment decisions. The emotions of fear and greed lead us to buy investments near the top and sell at the bottom. Investors often override their investment plan and bail out in a panic when the markets are in a serious decline. This is the worst outcome. Having the discipline to rebalance your portfolio on a regular basis and follow your investment plan through good and bad times is crucial for success. A simple idea, but hard to do.