Whether you’re a first-time investor or a long-term investing veteran, it's natural to wonder what your options are. So, we’ve put together a list of eight popular investing strategies to help you think about the journey for the long term.
The importance of understanding your investment goals
With long-term investing, the first step is clear: figuring out your financial goals .
Think of it as setting the destination for your financial journey. Whether you're saving for a cosy (early) retirement , buying a home, or funding a round-the-world trip, your goals will guide every investment decision you make.
Why? Because not all investment strategies are created equal. Some offer the potential for rapid growth, while others offer the possibility of steady returns. For instance, if you're eyeing retirement in the future, you might lean towards a mix of stocks and bonds . On the flip side, if you're saving for a dream home in the next decade, you might choose assets with less volatility.
Eight popular long-term investing strategies
With that in mind, here's our list of some of the most popular strategies among long-term investors. These aren’t necessarily recommendations, but are merely some suggestions to get you started.
And, as always, consider chatting to a licensed financial adviser before making any decisions that involve your money. No matter where you are in your investing journey, a financial expert can provide tailored advice based on your situation.
1. Diversification: the key to managing risk
Diversification is like spreading your bets across different chairs at a party; if one collapses, you've got plenty of others to sit on.
By spreading your investments across various asset classes , industries, and even countries, you can reduce the risk of a single event wiping out your savings. When one part dips, another might rise, keeping your financial ship steadier in rough waters.
But, it's not all smooth sailing. There is such a thing as over -diversification. This has the potential to dilute your returns, making it a delicate balancing act.
2. Dollar-cost averaging (DCA): investing regularly
Dollar-cost averaging (DCA) is like investing on autopilot. Instead of trying to time the market's ups and downs , you invest a fixed amount regularly, rain or shine. This could mean putting a portion of your paycheque into your investment portfolio every month, no matter what the market is doing.
The beauty of this approach? It can smooth out the price you pay for investments over time. When prices are high, your fixed amount buys less, and when prices are low, it buys more. This can be a game-changer for long-term investors, reducing the stress of market volatility and potentially lowering the average cost of investments over the long term.
That being said, DCA is not without its critics. Some argue that in a consistently rising market, you might miss out on gains by not investing a lump sum early on. But for those looking to build wealth steadily and avoid the pitfalls of market timing, dollar-cost averaging can be a solid strategy.
3. Lump sum investing: investing all at once
Lump sum investing is akin to diving headfirst into the pool rather than inching in toe by toe. It involves investing a large sum of money all at once, rather than spreading it out over time.
The main draw? If the market's on an upswing, you're positioned to immediately capitalise on potential growth, possibly leading to greater returns compared to investing smaller amounts gradually.
Of course, lump sum investing does have its drawbacks. It requires a strong stomach for risk, as timing the market can be notoriously tricky. Invest at the wrong moment and you could see your initial investment dip significantly in the short term.
4. Dividend investing: earning while you hold
Dividend investing is like getting a paycheque from your investments. It's all about choosing stocks that pay you a portion of the company's earnings regularly, typically quarterly. This strategy focuses on income as much as, if not more than, capital gains. It's especially appealing to those who want a steady income stream, alongside the potential for stock appreciation.
One major advantage of dividend investing is that it harnesses the power of compound interest – effectively where you earn interest on interest. This compounding effect can have a significant effect on your investment over time, making it a popular tool for long-term wealth building.
Note that dividend investing often leans towards more mature, slower-growing companies. So, while you enjoy those regular dividends, you might miss out on the rapid growth younger, more volatile companies can offer. Plus, dividends can be cut if the company hits hard times, affecting your income and investment value.
5. Growth vs value investing: two approaches to stock selection
Growth and value investing are two sides of the stock selection coin, each with their own strategy.
Growth investors chase companies with strong potential for future earnings growth, like tech firms or startups. They're willing to pay a premium for stocks they believe will soar. The upside? Massive returns if those companies hit their stride. The downside? High prices and volatility mean greater risk, especially if growth doesn't pan out as expected.
Value investors, on the other hand, look for undervalued gems – stocks trading below their intrinsic value. They're like bargain hunters, seeking quality companies at a discount, often due to temporary setbacks.
The pro here is the safety margin; you're buying with a cushion against market downturns. The con? It requires patience and a keen eye to distinguish between a true bargain and a company in genuine trouble.
Both strategies have their merits for long-term investing, but they cater to different levels of risk tolerance and investor personalities.
6. Real estate investment trusts (REITs): property investing via the stock market
Real estate investment trusts (REITs) offer a path into property investing. They pool investor money to buy and manage real estate portfolios, paying out most of their income as dividends. This makes REITs a go-to for investors craving steady income alongside real estate exposure.
The allure of REITs in a long-term portfolio is that they offer diversification beyond stocks and bonds. This can provide a hedge against inflation , since property values and rents tend to rise over time. Plus, REITs can be traded on major stock exchanges, meaning you can buy and sell shares much easier than physical property.
REITs aren't without their drawbacks. They can be sensitive to interest rate changes, potentially affecting their value and the dividends they pay. Also, because they're tied to the real estate market, they can suffer during downturns. It also pays to remember that REITs usually contend with commercial real estate, which offers different risks and benefits to residential.
7. Retirement accounts: taking advantage of tax incentives
In Australia, superannuation is the star player in the retirement savings game, offering a tax-advantaged way to save for your golden years. The beauty of superannuation is that contributions and the fund's earnings are taxed at a lower rate, making it a useful tool for long-term wealth accumulation.
Super isn't the only game in town. There are other retirement accounts, like self-managed super funds (SMSFs), which can allow more control over your investments. These can be part of a successful long-term investing strategy, especially if you're keen on tailoring your portfolio or investing in assets outside traditional super offerings.
But, there's a catch or two. Managing an SMSF requires time, knowledge, and adherence to strict regulations. Plus, there are caps on how much you can contribute to these accounts tax-effectively. This is why they often require professional advice to navigate successfully.
8. Ethical investing: aligning your values with your investments
Ethical investing is about making money while making a difference. It's where your values meet your long-term investment strategy, focusing on companies that prioritise environmental, social and governance (ESG) criteria .
The upside is that ethical investing doesn't necessarily mean sacrificing returns. Many ESG-focused companies are leaders in innovation and resilience, sometimes outperforming their less scrupulous counterparts in the long run.
It's important to do your homework, though. Not all "ethical" investments are created equal, and some may not align with your specific values. To dip your toes into ethical investing, start by researching funds that screen for ESG criteria.
As you can see, there are a range of different investing strategies for the long term. Do your research, consider your needs, and you'll be in a solid position to choose.
Happy investing!
