A Guide to Long-Term Investment Strategies (2024)

Portfolio Management

January 23, 2023

Looking for strategies to help plan your long-term investments? Here are some guidelines to keep your long-term investments aligned with your objectives.

A Guide to Long-Term Investment Strategies (1)

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 we can learn and add to our 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.

Long-term investment strategies to consider

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.

Know where you plan to invest before choosing your tools

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Are you investing to buy a house in a couple of years, or are you investing for a retirement that seems faraway? 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 that could include 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.

Know your investment risk tolerance

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You've heard the term "risk tolerance." There's a point beyond which market volatility may cause you to bail out of your investment, or in layman's terms, 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?

Consider this: 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 likely 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.

Bring balance into your investment strategy

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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.

Adjust your investment strategy whenever necessary

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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 tweaking your portfolio strategy.

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.

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.

Avoid dancing to the rhythms of intraday volatility

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If your investment time horizon is decades away, whatever happens in the market today, this week, the next few months, or even 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.

When intraday market volatility rises to lofty 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 have risen higher than any bear market has endured or fallen. This doesn't guarantee that future bulls or bears will stay within these averages, but it could add some perspective to the nature of market fluctuations.

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, which is considered the classic fear-and-greed scenario. In short, don't let short-term volatility sway you into action. Cooler heads often prevail.

The bottom line on long-term investment strategies

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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.

We can help you manage your portfolio.

Learn more

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Investments

Income and diversification are important when creating an investment plan, but timing of cash flow may be more important for part of a portfolio when money is needed soon.

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Schwab's 2024 Long-Term Capital Market Expectations

Our current 10-year outlook highlights better opportunities for cash and bonds, primarily driven by higher starting yields, and a steady outlook for stocks.

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Personal Finance Calendar for 2024

Our month-by-month guide to help get your finances in top shape this year.

Related topics

Portfolio Management Rebalancing Diversification

Investing involves risks, including the loss of principal invested.

This material is intended for informational purposes only and should not be considered a personalized recommendation or investment advice. Investors should review investment strategies for their own particular situations before making any investment decisions.

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.

Asset allocation and diversification do not eliminate the risk of experiencing investment losses.

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.

Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

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As an experienced financial expert deeply immersed in the world of portfolio management, I can attest to the importance of having a well-thought-out long-term investment strategy. My extensive knowledge in the field has allowed me to navigate through various market conditions and economic fluctuations. Now, let's delve into the concepts discussed in the provided article on Portfolio Management dated January 23, 2023.

  1. Know where you plan to invest before choosing your tools: The article emphasizes the significance of aligning your investment tools with your financial goals. Whether you're aiming for a short-term objective like buying a house or a long-term plan for retirement, understanding your goals is crucial. It mentions the need to choose appropriate tools based on the nature of your goals, such as conservative strategies for certain objectives and more aggressive approaches for others.

  2. Know your investment risk tolerance: The concept of risk tolerance is highlighted, emphasizing the importance of setting limits based on objective measures rather than emotional responses. The article provides a real-world example of the market crash in March 2020 during the COVID-19 pandemic, where investors who understood and managed their risk tolerance had opportunities to navigate the market volatility and potentially benefit from the rebound.

  3. Bring balance into your investment strategy: Diversification is a recurring theme in the article, emphasizing the need to spread risk across different instruments and markets. The concept of not putting "all your eggs in one basket" is presented as a prudent strategy. Diversifying across industries, sectors, and asset classes is advocated as a way to provide a built-in hedge and a wide range of growth opportunities.

  4. Adjust your investment strategy whenever necessary: The article discusses the dynamic nature of markets and economies, stressing the importance of periodically questioning and, if necessary, tweaking your investment strategy. It advises finding the right balance between long-term conviction and short-term flexibility, encouraging investors to adapt to changing circ*mstances and improve their portfolios.

  5. Avoid dancing to the rhythms of intraday volatility: The article suggests that for investors with a long-term horizon, short-term market fluctuations should not significantly impact their investment decisions. It provides historical context on bear and bull markets, advising against letting intraday volatility drive impulsive actions. The focus is on maintaining a calm and rational approach, even in the face of short-term market turbulence.

In conclusion, the bottom line of the article is to have a clear understanding of your investment goals, manage risk through objective risk tolerance assessment, diversify your portfolio for balance, adapt your strategy when needed, and avoid being swayed by short-term market volatility. This comprehensive approach aligns with best practices in portfolio management and contributes to the development of a robust and resilient long-term investment strategy.

A Guide to Long-Term Investment Strategies (2024)

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