Best Tips for Long-Term Investing: The stock market is filled with uncertainty, however, certain tried and tested principles can help investors to boost their chances for long-term success. Long-term investing is a strategy where investors hold on to their investments for a long period of time, usually five years or more.
It comes with benefits like compounding, tax advantages, and cost savings. In fact, it is a way to fund goals like building a sizeable retirement corpus and beating inflation.
As a long-term investor, one should understand that one’s strategy will differ from those who are trading or making short-term gains. Everyone’s goals and requirements are unique. It is important to do one’s own research and come up with one’s own strategy. Many people compare long-term investing with test cricket. Well, both require patience, discipline, perseverance, and planning.
Here are the 10 Best tips for long-term investing:
1. Let go of the Losers, Cling on to the Winners
Some of us have the tendency to cling to poorly performing investments, with the hope that they might rebound, however, it is important to be realistic. It is important to analyze the prospects of losing stocks and selling them to trim further losses.
On the contrary, many of us tend to sell or let go of winning stocks too quickly, in an attempt to book profits. We think that they’ve already provided massive returns and there might not be much scope left.
Peter Lynch, an American investor, and mutual fund manager who is known for his stock-picking skills, attributed his success to a small number of these stocks in his portfolio. He coined the terms “multi-baggers” and “ten baggers”. Multibaggers are shares that provide returns that are multiple times the amount invested. Tenbaggers are shares that provide returns that are ten times the amount invested.
The market veteran said that generating multi-bagger returns required the discipline of hanging on to stocks even after they’ve increased by several times if he thought there was still significant upside potential left.
This indicates that one must let go of general perceptions and judge companies on their fundamentals and merits. One must find out if the price justifies their future potential. Holding on to losers and letting go of winners will do one no good.
2. Stop Chasing Hot Tips
This one was coming. Even if a source is credible, never accept a stock tip. In the market, we’re bound to receive tips. Some people pay the so-called “experts” for tips, but stock tips can sway either way. While they can make profits, there is a probability of the tip going wrong, in which case one can lose the complete amount that is invested. Always analyze a company on your own before investing your money.
3. Past performance is not indicative of the future performance
“If I’d bothered to ask myself, ‘How can this stock possibly go higher?’ I would never have bought Subaru after it already had gone up twentyfold. But I checked the fundamentals, realized that Subaru was still cheap, bought the stock, and made sevenfold after that,” said Peter Lynch in his book “One up on Wall Street”.
“Past performance is not indicative of future performance,” we often find sentences like this in the fine print. Investing requires making informed decisions based on various parameters and not just on past performance. Past performance does not necessarily indicate what the future holds.
If an investment has performed poorly, it does not mean that it will continue to perform poorly. Similarly, if it has already given very high returns, it does not mean that it cannot continue to do so.
4. Do not give in to the lure of Penny Stocks
Novice investors think that it’s a great idea to invest in penny stocks. The amount invested is low, and there is a chance to double, triple or quadruple money. However, high returns come with high risks. Penny stocks are incredibly risky. These stocks are available at a price lower than ₹ 10 and have a market capitalization of less than ₹ 500 crores.
Novice investors tend to buy these stocks in huge quantities because they get more shares for the capital invested. This can be a recipe for disaster. They do not realize that penny stocks are capable of eroding their investment. These stocks are not highly regulated and are often very volatile. They have a low trading volume and can fall prey to pump-and-dump schemes.
5. Diversification
It is often said, “ Do not put all your eggs in one basket.” Diversification provides stability to a portfolio and balances risks. Within equity, one can invest in large-caps, mid-caps as well as small-caps. In addition, diversification can be based on different types of stocks like dividend-paying stocks, defensive stocks, growth stocks, and so on. While marquee investors favor concentrated portfolios, optimum diversification augments returns as market events affect different types of stocks differently.
6. Consider the P/E ratio, but do not decide
Often, investors overemphasize the P/E ratio, a.k.a, the price-to-earnings ratio of companies. This indicates if a stock at the current market price is expensive or cheap. While the P/E ratio is an essential factor to consider, it is not the sole factor on which one can decide whether to invest in a company or not.
The P/E ratio is used in conjunction with other parameters. Hence, a low P/E ratio doesn’t necessarily mean a security is undervalued, nor does a high P/E ratio necessarily mean that it is overvalued.
7. Consider these factors while choosing stocks
Shortlist companies based on a two-minute analysis. Use a screener to shortlist them based on factors like market capitalization, growing or consistent revenue and profit, ratios like the debt-to-equity ratio, return on equity, return on capital employed, price-to-book value, and the like.
After shortlisting companies, go through their financial statements. Refer to the notes to accounts of line items with a significant value. For example, understand if a company is making most of its income from its regular business or its other sources like dividend income or another line of business. If a fertilizer company makes more money by receiving dividends, rather than its main business, it could be a red flag.
Be sure to take a look at the industry that it functions in, its credit rating, its latest results, client additions, expansions, FII/DII investments, shareholding patterns, details about its order book, market share, and government schemes that can benefit the company.
8. Do not blindly follow ace investors
Whether we believe it or not, even ace investors make mistakes. Even the legendary Warren Buffett admitted that his investment in Tesco, a retailer, had been a huge mistake. Another problem is that we do not know the exact time at which an ace investor enters or exits an investment.
Retail investors who blindly follow ace investors invest a large portion of their portfolio in that particular stock. If something goes wrong with the investment, the ace investor will exit in time, but retail investors do not have access to that information, and being overweight on a stock can make them lose a chunk of money.
9. Be concerned about taxes, but do not worry about them
Investors must focus on post-tax returns. Long-term investors focus on tax efficiency as taxes can wipe away a lion’s share of their profits. They understand short-term taxation as well as long-term taxation. In addition, they know to a fair extent the impact of taxation on corporate actions like dividends, buybacks, bonus issues, and so on.
However, putting taxes above all else can cause investors to make misguided decisions. While tax implications are important, they are secondary to investing and securely growing one’s money.
10. Choose a brokerage
Decide if you want to go with a discount broker or a full-service broker. Discount brokers typically offer low-cost brokerage services. They do not offer add-ons like research, advisory, a dedicated relationship manager, and local branch support, unlike full-service brokers who charge higher fees. When one is doing their own research, paying fees for services that will hardly be used makes little sense.
In closing
In this article, we took a look at the 10 Best tips for long-term investing. These include analysis, taxes, brokerage, penny stocks, ace investors, and more. Long-term investing requires a deeper study of an underlying company. It does not depend on day-to-day price movements and the timing of the market.
The bottom line is that long-term investing involves decisions based on cold logic and analysis. That’s all for this article, folks. We hope to see you around and happy investing until next time!
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