Investors can boost their long-term chances of success by following certain tried and true principles.

It’s not enough to find “hot stocks” and time market swings perfectly. Successful long-term investors instead focus on tried-and-true strategies that can help them grow their portfolios while weathering market volatility over years or decades.

Investors can lock in profits by selling appreciated investments and holding on to underperforming stocks that they hope will recover. Good stocks can go higher, while poor stocks could be wiped out. We’ve compiled 10 tips to help you avoid mistakes and generate profits.

Key Takeaways

• The key to long-term investment success is a disciplined approach, not just picking “hot” stocks and timing market fluctuations.
• Successful investors tend to hold on to their winning investments for longer while also being willing and able to cut their losses from underperforming investments.
• Investors who diversify their portfolios and stay invested throughout market cycles have the best chance of positive returns.
• Follow proven investing principles, such as focusing on an investment’s future potential rather than its past performance, to avoid common investing errors.
• It is more important to have a consistent investment strategy than to try to maximize each trade.

1. Adopt a long-term perspective

Avoid the mentality that says, “Get in and get out,” which is a quick way to try to make money from trades. Holding onto a stock for the long term should yield profits if you have done your research to find a reliable investment.

It’s crucial to determine whether you are an investor or a trader. David Tenerelli CFP said that for most people, in most situations, an investment strategy that is long-term and diversified with low costs, but also buy-and-hold, would be more appropriate than active trading. This is because it allows the investor to ignore the noise and focus instead on a disciplinary approach.

Important

Tenerelli said that dollar-cost-averaging is a good long-term investment strategy. This involves putting aside a certain amount of money every month, regardless of the market conditions. It takes discipline to keep buying investments in a down market, but a change of mindset can help. Instead of fearing financial losses, investors can frame it as purchasing stocks “on sale.”

Long-term investments are essential for greater success. While short-term gains can be attractive to newcomers in the market, they do not guarantee them success. While short-term trading can be profitable, it is more risky than buy-and-hold strategies.

Even small investments made in the S&P 500 since 2000 would have yielded fantastic returns despite world wars, pandemics and financial crises.

2. Do not chase a hot tip

What is the “must-have” stock tip that your neighbour gave you? You should probably ignore it. Even if the tip comes from a person who appears to be knowledgeable, building your house on sand is not advisable. Never accept stock tips as valid, no matter who gave them. Do your research on a company prior to investing.

Although some tips are useful, you should always do your research to ensure long-term success.

Note

Every stock purchase deserves careful examination. You should understand what the company does, how it makes money, and why it might succeed in the Future.

3. Do not sweat the small stuff

It is better to track the long-term trajectory of an investment than to panic about its short-term fluctuations. Do not let short-term volatility affect your confidence in an investment.

Do not overemphasize how much you could save by using a market order instead of a limit order. Active traders may use minute-by-minute fluctuations to lock in gains, but investors who invest for the long term do so based on long-term periods.

Note

“ The best time to invest when you have money is now. “Buy and hold your investments until you achieve your financial goals, rather than trying to time the market,” said Christina Lynn. She is a behavioural finance researcher and certified financial advisor at Mariner Wealth Advisors.

4. You can look beyond the price-to-earnings ratio (P/E).

The P/E, which compares the stock price of a company to its earnings, provides valuable information, but it’s not all there is. A low P/E does not mean that a stock is inexpensive, and a high one doesn’t necessarily indicate an overpriced share.

Netflix Inc. (NFLX), for example, looked expensive based on P/E ratios for a very long time. It was still creating huge shareholder value. Consider growth rates, the market position and other factors.

In addition, the P/E ratios must be viewed in relation to specific industries and sectors. Below is a chart that shows some of the differences from sector to sector.

5. Avoid Penny Stocks

Their low prices often reflect serious business problems rather than opportunity. They are usually priced low because of serious business problems, not opportunity. 1

Penny stocks can be more volatile and less regulated than other stocks.

Important

Please pick up a print copy of our special edition to read Investopedia’s 10 Rules for Investing.

6. Choose a strategy and stick to it

It is important to stick with one philosophy when picking stocks. A good investment strategy keeps you on track when the markets are rocky. Consistency is important, regardless of whether you invest in value, growth or dividends.

Consider how Warren Buffett, a noted investor, stuck to his values-oriented strategy. He avoided the dot-com bubble of the late 90s and suffered no major losses as tech startups collapsed.

7. Focus on the Future

Making informed decisions about the Future is essential to investing. Data from the past can be a good indicator of what’s to come, but it is never guaranteed.

Peter Lynch, the legendary investor, wrote in “One Up on Wall Street”: “If I had bothered to ask, ‘How could this stock go higher? I never would have bought Subaru when it was already up 20 fold. But after I looked at the fundamentals and realized that Subaru stock was still affordable, I bought it, and the stock grew seven-fold. “2

You should invest based on your future potential, not past performance.

Note:

Stock prices are more affected by a company’s growth potential than its performance in the past.

8. Buy the losers and let the winners ride

Knowing when to sell is one of the most difficult aspects of investing. Investors often sell their winning investments too soon while holding onto their losing investments in the hope that they will bounce back.

Peter Lynch made much of his fortune by identifying stocks that became “tenbaggers”–investments that increased 10 times in value. To capitalize on these rare winners, you need to have the discipline to hang onto them after they’ve doubled or tripled in value as long as their growth potential remains strong.

Note

It is important to evaluate each investment based on its merits rather than relying on arbitrary rules such as “sell after a gain of 20%.”

This required discipline to hold onto stocks, even when they had increased by many multiples.

Holding onto losing investments for too long is dangerous. Accepting losses can be difficult psychologically, but holding on to them can be risky. It’s not guaranteed that a stock in decline will recover. Your money would be better spent elsewhere.

9. Be open-minded

Brand awareness is important for many great investments, but not all. Thousands of smaller companies could become blue-chip names in the Future.

It is not meant to suggest you allocate your entire portfolio to stocks that are below the Dow Jones Industrial Average. However, there are many other great companies than those listed on the Dow Jones Industrial Average. NVIDIA, for example (NVDA), was a penny stock not so long ago. By the middle of 2020, its investors were able to make significant gains.

10. Do not obsess over taxes, but do keep them in mind

Tax efficiency is important but shouldn’t be the main factor in your investment decisions. Consider taxes as air resistance in driving: worth considering, but not the primary factor when choosing your route.

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What is long-term investing?

Three years is considered long-term. Long-term investing is defined as holding onto an asset, such as real estate or stocks, for longer than three years. Capital gains tax is charged when individuals sell investments at a gain. This applies to those who have held them for more than one year. If an investment is held for less than one year, the investor will be taxed at his ordinary income rate. This rate is not as advantageous as capital gains.

Which Investment Offers the Best Return?

Some investments are more secure than others and offer higher returns. These assets include Treasury Bills, Series I Savings Bonds, Certificates of Deposit, High-Yield Savings Accounts, Money Market Funds and Certificates of Deposit.

What are the disadvantages of long-term investing?

Long-term investments have a high opportunity cost. Long-term investments entail a loss of funds that can be used to invest in other opportunities, including short-term gains. Long-term gains may make those opportunities seem insignificant.

The Bottom Line

It’s not about timing the market perfectly or finding the next hot stock. Instead, it’s about consistently following tried-and-true principles.

Investors can steadily build wealth over time by focusing on the fundamentals, such as holding quality investments long-term, conducting thorough research instead of following tips, and remaining disciplined during volatile markets.

Although no strategy can guarantee profits, these 10 principles will help investors avoid common pitfalls and make better decisions about their financial futures.