Looking for a few rules to help you plan your long-term investing? Here are five guidelines to help keep your long-term portfolio aligned with your objectives.
Understanding these basic investment rules can help you put short-term and long-term market dynamics into perspective
Balancing short-term flexibility and long-term conviction in your investing approach can be tricky, but it’s a skill that might potentially benefit investors
If you’re looking to continually improve your market knowledge and experience, then school’s always in session. Rain or shine, every market day presents us with a little something that we can learn and add to our storehouse of market wisdom.
With that said, no matter how sophisticated your financial knowledge, it always helps to revisit a few of the bedrock basics that support the rest of your investment knowledge.
There are many different rules out there, each geared toward different investment styles and goals. If you’re setting your sights on the far horizon, here are five ideas to consider that may help you along the path toward your long-term investment goals.
Are you investing to buy a house in a couple of years, or are you investing for a retirement that seems eons away? Are you investing to achieve or maintain a certain retirement lifestyle for yourself and your spouse, or are you looking to build a sizable legacy for your kids?
Whatever your financial goals may be—and you may have several—it helps to know exactly what you’re trying to build before you start rummaging through your financial toolshed. Some goals may require conservative strategies or products (such as fixed-income assets), while others may require a more aggressive approach (like small-cap or emerging-market stocks). You have a diverse set of tools and strategies to work with. Before you learn to use them, make sure you’re choosing the right ones.
You’ve heard the term “risk tolerance.” There’s a point beyond which market volatility may cause you to bail out of your investment (that is, cry uncle). Perhaps your risk exposure was too large, or maybe your investment rationale wasn’t very good to begin with. Whatever the case may be, it helps if your risk tolerance limit is based on an objective measure rather than an emotional response. If you don’t know your risk limits, then how will you know if you’re taking on too much risk or not enough?
Let’s look at a recent example. When the markets crashed in March 2020 amid the onset of the COVID-19 pandemic, many investors sold a large portion (or all) of their equity holdings in a massive bout of panic selling. But the market rebounded sharply over the next two months, and many who unloaded their portfolios probably missed out on the rebound. In contrast, those who managed their risk levels might have had the opportunity to rebalance or add to their portfolios when asset values were approaching discount levels.
Gauging your personal risk tolerance might help you stay on top of market opportunities, rather than allowing the market to roll over and “flatten” your portfolio.
We’ve heard it countless times before: diversify, diversify, diversify! It’s like a looping mantra in investing circles. There is some truth to it, to say the least. When a stock undergoes a major decline, it can be for a good reason (maybe it’s overvalued but otherwise solid) or a bad reason (the company is a sinking ship). The same principle can be scaled up and applied to industries, sectors, and whole asset classes (stocks, bonds, commodities, etc.).
We all know it’s prudent not to place “all your eggs in one basket,” as the saying goes. So, many investors diversify to spread their risk across a broader range of instruments and markets. This exposes a portfolio to a wider range of potential return sources. And if a segment of your portfolio is underperforming, then hopefully other segments of your portfolio are faring better. Ideally, a diversified portfolio can give you a wide range of growth opportunities with something of a built-in hedge. That’s the long-term goal behind diversification.
There’s no investment approach, strategy, or principle that’s so solid or robust that it can’t or shouldn’t be questioned from time to time. Markets and economies are dynamic. Every now and then, you’ll need to consider making adjustments and tweaks to your portfolio strategy.
For investment guidance for your unique goals, get our custom support and recommendations from TD Ameritrade Investment Management, LLC.*
After all, your best strategy should start with you.
Know when and how to question your own investing ideas and beliefs. This doesn’t mean you have to be overly fickle, changing your long-term investment strategy too hastily or too often. But it also doesn’t mean you have to remain stubborn, sticking to an investment strategy that’s clearly not working out. It’s hard to find the right balance between long-term conviction and short-term flexibility. But questioning your investment assumptions, ideas, and strategies can help you better understand what you’re doing, how you’re doing it, and what else you can do to improve your portfolio.
If your investment time horizon is decades away, more or less, then whatever happens in the market today, this week, in the next few months, or even in the coming years may not significantly impact your long-term investment returns in a negative way. Of course, if the market retreats for an extended period, dollar-cost averaging or rebalancing might help when the market eventually gathers enough steam to advance.
In the early part of 2020, intraday market volatility rose to unprecedented levels. That kind of price action can be enough to frighten any investor. But if you’re setting your sights several years or decades down the road, what happens today shouldn’t matter to you all that much.
To put things into perspective, the longest bear market in U.S. history (according to FactSet data) lasted for three years, from 1946 to 1949. The average bear market from the 1940s to the present lasted around 14 months. Historically, in contrast, bull markets have lasted longer and risen higher than any bear market has lasted or fallen. This doesn’t guarantee that future bulls or bears will stay within these averages, but it does put the matter of market fluctuations into perspective.
Markets rise and fall, economies expand and recede, and intraday swings shoot up and crash down. If your financial goal is years or decades away, what happens in the market at this very moment shouldn’t cause you to sell or buy on impulse (the classic fear-and-greed scenario). In short, don’t let short-term volatility sway you into action. Cooler heads often prevail.
To sum it all up: Know what you’re investing for, know the limits of your financial comfort zone, spread your financial prospects into different baskets, question your investment ideas and approaches every now and then, and don’t let fluctuations distract you from your long-term investing goals.
for thinkMoney ®
Financial Communications Society 2016
for Ticker Tape
Content Marketing Awards 2016
Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.
Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
S&P Global Market Intelligence is separate from and not affiliated with TD Ameritrade, which is not responsible for their services or policies.
*Advisory services are provided by TD Ameritrade Investment Management, LLC (“TD Ameritrade Investment Management”), a registered investment advisor. Brokerage services provided by TD Ameritrade, Inc. TD Ameritrade Investment Management provides discretionary advisory services for a fee. Risks applicable to any portfolio are those associated with its underlying securities. For more information, please see the Disclosure Brochure (Form ADV Part 2A).
All investments involve risk, including loss of principal. Past performance does not guarantee future results. There is no assurance that the investment process will consistently lead to successful investing.
Asset allocation and diversification do not eliminate the risk of experiencing investment losses.
TD Ameritrade and all third parties mentioned are separate and unaffiliated companies, and are not responsible for each other’s policies or services. and not affiliated with TD Ameritrade, which is not responsible for their services or policies.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC, and a subsidiary of TD Ameritrade Holding Corporation. TD Ameritrade Holding Corporation is a wholly owned subsidiary of the Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2020 Charles Schwab & Co., Inc. Member SIPC.