The past week saw huge volatility in the stock markets due to the fall of major banks in the US. This shook the world and raised concerns about an impending recession. However, when the stock market falls it is also an opportunity for long-term investors. Such investors do not have to worry about short-term volatility and its impact on their investment portfolio. So are some of the long-term strategies that you could adopt to make the most of your portfolio.
Read More: What should you consider while buying best stocks for the long-term
What are long-term investments and is it important?
Long-term investments are financial assets that are held by an individual or an organisation for an extended period. The time period to define long-term investment will depend on the nature of the asset. For example, equity shares should be held for a minimum of 12 months while debt, real estate, etc should be held for a minimum period of 36 months to be classified as long-term investments. The primary purpose of holding these investments is to meet different long-term financial goals and secure the financial future.
Long-term investments are an important addition to the long-term portfolio as they provide the maximum benefit of compounding. This is one of the prime features of the most dynamic and popular investment options. Long-term goals like buying a house, creating a retirement corpus, and accumulating wealth for meeting long-term expenses like funds for higher education, the wedding of a child, etc. are met through long-term investments. Investors of these investments do not have to worry about market volatility and economic cycles. These types of investments allow the investors to not react to short-term volatility or emotionally to short-term events.
What are the long-term investment strategies?
Investment strategies are often defined as the tips and tricks or methods of investment used by investors to create their investment portfolios. Investors can use various long-term strategies to ensure that they meet their long-term financial goals efficiently and successfully. Some of these strategies are discussed hereunder.
Set a goal and stick to it
The starting point to creating a long-term portfolio is to set a goal and stick to it. Investors should keep investing in their selected assets to meet their target goal and ensure consistency. This will not only help in driving the much-necessary discipline for investing but will also help in meeting the goals successfully in a time-bound manner.
Start investing early
Most successful investors have one thing in common and that is to start working toward their long-term investment portfolio from a very early stage. Most experts believe that investors should start investing in their long-term goals right from the start of their careers. Compounding is the prime benefit that is available in dynamic and long-term investment options like PPF, mutual funds, NPS, etc. By investing early investors can get the maximum benefit of compounding and ensure that long-term investments provide maximum returns.
Buy and hold
This strategy involves purchasing quality investments that align with the personal risk[-return expectations and holding them for an extended period. The primary or the usual definition of long-term in this context is a period of ten years or more. Investors should ignore the short-term volatility of such investments and realise the expectation that they will appreciate in value over time.
Invest based on sufficient fundamental analysis of the asset and ignore short-term volatility
This strategy involves thorough research of the underlying fundamentals of an asset, such as the company’s financial health, market position, competitive landscape, and growth prospects, to determine its intrinsic value. This approach involves looking beyond short-term market fluctuations and focusing on the long-term potential of the investment. The idea behind this strategy is that market prices may fluctuate in the short term due to various factors, such as economic conditions, political events, or news releases but the long-term prices will always reflect its intrinsic value. Focusing on the fundamentals of the security allows the investors to identify undervalued assets at the same time not be fooled by overvalued ones.
Diversified portfolio
“Do not put all your eggs in one basket’ is the advice we have heard over and over again. A diversified portfolio involves investing in a mix of assets belonging to different classes like real estate, commodities, stocks, bonds, etc. This helps in spreading the risk towards assets that have a low correlation with each other. It can not only help in providing improved returns but also provide potentially higher tax benefits and increased flexibility of investment.
Periodic review of the portfolio
Another important long-term investment strategy is to continuously monitor the investment portfolio. This allows investors to efficiently track the performance of the investments and ensure optimum asset allocation weeding out investments that no longer meet the individual parameters of investing.
Investing in assets that can generate passive income
Most investment advisors suggest having suitable avenues of passive income in the investment portfolio to ensure a smooth flow of income even in volatile markets. Therefore investing in long-term assets that can generate sufficient passive income is not only instrumental in wealth creation but also in lowering the burden in the post-retirement period. Passive income investments are especially a preferred choice of investment and income source for risk-averse investors.
Conclusion
There are several long-term investment strategies that are used by novice and seasoned investors across the globe. There is no strategy that can be consistent to be most optimum in long-term investment rather a long-term investment is a collection of many such strategies.
FAQs
Long-term investment options include Bank FDS, PPF, NPS, mutual funds with a long-term investment horizon, etc.
Some of the crucial benefits offered by long-term investment include lower risk and the potential for higher and stable returns.
It is important to keep reviewing the investment portfolio to ensure all the investments are aligned with the risk-return parameter of the investors and are consistently contributing in increasing the wealth. If a few investments do not match these requirements, they should be replaced from the portfolio with new and dynamic investments that suit the investor accordingly.
Coffee can investing also requires the investors to invest in well-established securities based on certain parameters and hold them for a long tenure. Hence, it is also a type of long-term investment strategy.
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