In a recent article here on Capitalist Cabin, I talked about long-term investment. I started my knowledge on long-term investments and what are your options in which you can invest. Here is the link to that article –
But before all that, is there something that you need to get straight with before investing for the long term? Yes, there is. There are certain measures and steps that you need to take. You obviously have to set the stage before a performance, right? The same goes for investments. Especially with long-term investments.
Here are some of the prerequisites before entering the long-term investment world –
Table of Contents :-
Tips For Long-Term Investment
Manage Your Finances:
Don’t act like you never knew this was coming! You know that managing your finances is crucial, yet you slack off. We all do. But we shouldn’t.
When you are aiming to stay invested for a long period of time, you need to manage your money. You need to have a fixed budget, money to invest regularly, spare money for sudden expenses, emergency funds, etc. All the rules of Personal Finance are applied in this one point of managing your finance.
If your life and money outside of the investment game are sorted, only then can you invest with a disciplined and calm mind? Also, when you invest in the long term, there is very likely a goal you wish to achieve. Be it a corpus for retirement, home, or a number to accumulate. For that, you need to have a knowledge of your current situations and surroundings.
Therefore, analyze your current state, manage all your finances, create an emergency fund and then jump into the investing game.
Decide the Time for which you wish to Stay in Game
Everyone in this world is living and fighting for different goals and dreams. The same is with the people who are in the investing game. Every soul invests with a purpose. Someone might want a corpus to retire. I may be investing in a big house which I want after 10 years. You may want to invest in multiple goals. Everyone has a different story.
But mind you, every goal requires a different time horizon, and this is what you need to get straight. Say you want to buy a house and an exotic car after 12 years. Now that you realize your time horizon, you can easily calculate the amount you need and the amount you have to invest for the next 12 years. If that doesn’t seem feasible, try adjusting the time with the money you can invest.
This eases your mind and prepares you for the coming years. Hence, decide your goals and time horizon.
Develop an Investing Strategy (Diversification)
By now, you have managed your finance apart from investments. You have calculated your time horizon and probably your investing goal. All that’s left is a strategy to abide by. By strategy, I mean the allocation of your money.
The CEO of New York’s Francis Financial, Stacy Francis states that are 3 time horizons of investing in the long term. These are –
- 5 to 15 years
- 15 to 30 years
- More than 30 years
You should distribute your money depending on your investment period. Say, if it falls within the first category, your investments must be in the ratio of 60:40. The means 60% in stocks and equity. The rest is 40% in bonds. Similarly, for the second & third categories, the ratio will be 50:50 and 40:60, respectively.
But times have changed, and there are multiple investment options available now. This just gave me an idea for the next article. In the next article, I’ll state an ideal diversification plan for you. Till then, for your strategy, you can opt for a ratio of Stocks:Funds:Bonds: Crypto.
Analyze your Risk Profile
You must be aware that Market investments are subject to risks. If cards are not played right, you may end up losing money, especially in these new generation investment options like Cryptocurrency and NFTs.
Therefore, it is wise if you analyze your risk potential beforehand. Ideally, the younger you are, the more risk you should take. And with age, you may reduce the risk factor of your portfolio. However, it is just a generalized notion.
Your risk profile can be anything, high-risk, medium-risk, or low-risk. It is what you choose and feels comfortable at. Your risk profile doesn’t concern me, but the fact that you analyze it does. Alongside your individual risk tolerance, analyze the risks involved in your investments too. Better be prepared for any outcome, right?
The Final Words
Your life is long, and you can’t just live it without any planning and analyzing your surroundings. The same goes with long-term investment too. When you decide to invest for the long-term, you also decide to devote all these years to a plan which you wish to achieve after a time.
Hence, abiding by all the above steps – Manage your money in every aspect, decide your goal & time span of investment, choose a strategy according to your risk profile and age. These are the key points to look at before you invest for the long term.
Also, don’t believe in return calculators if you do. You have to keep in mind the inflation after all those years, which these calculators ignore. Inflation is the real deal.
I hope I have made myself clear. Now, if you have any questions or if you wish to have a one-on-one interaction with me, contact me on Twitter – @sushrutkm
I won’t mind a follow-though!