Going the Distance: Investing Is Like Training For A Marathon
When training to go the distance in a marathon, you build on your current fitness, mix up your activities to build strength, and continually check your progress. Investing for the long-term is really no different.
Start Small: Dollar-cost averaging
Dollar-cost averaging is a method of accumulating shares of stock or a mutual fund by purchasing a fixed dollar amount of these securities at regularly scheduled intervals over an extended time. When the price is high, your fixed-dollar investment buys less; when prices are low, the same dollar investment will buy more shares. This allows you to have a plan to stick with, rather than trying to time the market.
Cross Training: Asset allocation
Asset allocation is the process by which you spread your dollars over several categories of investments, such as stocks, bonds, cash (and cash alternatives), real estate, precious metals, collectibles, and in some cases, insurance products. The primary reason to embrace asset allocation is that these asset classes do not respond to the same market forces in the same way at the same time, which helps to minimize the effects of market volatility while maximizing your chances of return in the long term
Tempo: Buy and hold, don’t buy and forget
Unless you plan to rely on luck, your portfolio’s long-term success will depend on periodically reviewing it to ensure that your asset allocation reflects you and your family’s projected needs.
For example, if you initially decided on an 80 percent-to-20 percent mix of stocks to bonds, you might find that after several years the total value of your portfolio has shifted to 88 percent stocks and 12 percent bonds. To re-balance your portfolio, you would buy more of the asset class that’s currently lower than you desired, possibly using some of the proceeds of the asset class that is now larger than you intended.
Intervals: Diversification and liquidity
There’s no denying it- the financial marketplace can be volatile. Still, it’s important to remember that the longer you stay with a diversified portfolio of investments, the more likely you are to reduce your risk and improve your opportunities for gain. Also, consider your financial needs’ timeline when investing. If you might need the money soon, invest it in more liquid investments. If time is on your side, consider long-term investments.
The Long Run: Compounding interest
It’s the “rolling snowball” effect. Simply put, compounding pays you earnings on your reinvested earnings. Money left alone in an investment offers the potential of a significant return over time, which is why we recommend fully funding all tax-advantaged retirement accounts and plans available. With time on your side, you don’t have to go for investment “home runs” in order to be successful.