Top five tips for successful long-term investing
Looking to reach your financial goals through long-term investing? Experts at Schroders share five tips for success, including starting early and diversifying your portfolio. Read on for more.
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Investing is a powerful tool for building wealth over time, but it can be intimidating for those who are new to it. Here are five top tips to help you succeed as a long-term investor.
1. Start early and be consistent
You are always going to have competing claims on your money – but the one thing to remember is that successful investment’s most powerful ally is time.
Start young, and you have time on your side. That’s partly because you will have longer in which to put money aside. But, more importantly, it means more of your money will benefit from “growth on growth” – or compounding. In other words, the returns you make in year one will themselves attract returns for all the future years in which they remain invested.
The power of time: the magic of compounding
Regular saving: save £100 per month, assuming 6% annual returns*
After…
2 years | £2,543 |
3 years | £3,934 |
5 years | £6,977 |
10 years | £16,388 |
15 years | £29,082 |
20 years | £46,204 |
30 years | £100,452 |
*Compounded monthly
2. Stay invested for the long-term
It’s also important to be patient and avoid the temptation to make impulsive investment decisions based on short-term market fluctuations. Many investments can be volatile in the short-term term. Worrying news – the outbreak of conflicts, for example, or crises in the supply of energy or other commodities – can hit world shares and create an atmosphere of panic. History suggests these mood swings do not last for long; at some point markets recover their confidence.
Trying to gauge these market moods is risky and can cost long-term returns. The danger is that you would be inclined to pull your money out of the markets only after a fall has taken place. At that point you may be at risk of missing out on the rebound when confidence returns. For more on this, read our guide to investing a lump sum.
3. Diversify your portfolio
Diversification is the technical word to describe the reduction of risk by selecting a range of different investments. By spreading your investments across different asset classes (such as bonds and/or shares in companies) you can help to reduce your overall risk.
Within each asset class it’s also important to diversify your holdings – for example, instead of investing in the shares of just a few companies, you would choose shares in a wider range of companies operating in different industries and markets. Putting your money into a diversified portfolio, or fund, is a popular way of achieving this.
4. Watch out for tax, costs and other drags on your total returns
Investments are subject to tax in various ways. If the value of your investment rises over time, for example, you could potentially be liable to capital gains tax. In recent years the UK government has tightened the rules on capital gains tax.
Investment income – for example in the form of dividends – is also potentially liable to tax.
One way to limit the effects of tax is to choose tax-efficient savings “wrappers” in which to hold your investments, such as Isas or pensions. Isas are for many people the first port of call, as they generally allow easier access to your money if it should be needed. For more on stocks and shares Isas read our guide.
Fees and expenses can also eat into your investment returns over time. It’s sensible to know what costs are applied both to the investments themselves (such as funds) and also to your “wrapper” account – such as the stocks and shares Isa – in order to check that you’re getting value overall.
5. Keep an eye on your investments and seek advice when needed
All in all, successful long-term investing requires some patience and discipline. But it’s very rewarding to watch your savings pot grow over time.
For most people there are times when professional advice can be well worth the cost. You may need guidance, for example, on how to achieve the correct diversification (see above). Or, particularly if you are involved in a financial life-change (property purchase, retirement), you may need help to ensure your investments are arranged in the optimal way to limit tax liabilities and to help meet your goals.
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