10 Tips for Successful Long-Term Investing

There are essentially two strategies for boosting savings and investments: Increase your income and cut your spending.

Whether you’re a young adult ready to start saving for retirement, a 50-something ready to pay off your mortgage or a senior citizen living on a fixed income, these tips can help you build savings, reduce debt, boost income and invest smartly.

1. Review your needs and goals

It’s well worth taking the time to think about what you really want from your investments.

Knowing yourself, your needs and goals and Your appetite for risk is a good start, so start by filling in a Money fact find.

2. Consider how long you can invest

Think about how soon you need to get your money back.

Time frames vary for different goals and will affect the type of risks you can take on. For example:

  • If you’re saving for a house deposit and hoping to buy in a couple of years, investments such as shares or funds will not be suitable because their value goes up or down. Stick to cash savings accounts like Cash ISAs.
  • If you’re saving for your pension in 25 years’ time, you can ignore short-term falls in the value of your investments and focus on the long term. Over the long term, investments other than cash savings accounts tend to give you a better chance of beating inflation and reaching your pension goal.

3. Make an investment plan

Protect yourself

Once you’re clear on your needs and goals – and have assessed how much risk you can take – draw up an investment plan.

This will help you identify the types of product that could be suitable for you.

A good rule of thumb is to start with low risk investments such as Cash ISAs.

Then, add medium-risk investments like unit trusts if you’re happy to accept higher volatility.

Only consider higher risk investments once you’ve built up low and medium-risk investments.

Even then, only do so if you are willing to accept the risk of losing the money you put into them.

4. Diversify!

It’s a basic rule of investing that to improve your chance of a better return you have to accept more risk.

But you can manage and improve the balance between risk and return by spreading your money across different investment types and sectors whose prices don’t necessarily move in the same direction – this is called diversifying.

It can help you smooth out the returns while still achieving growth, and reduce the overall risk in your portfolio.

5. Decide how hands-on to be

Investing can take up as much or as little of your time as you’d like:

  • If you want to be hands-on and enjoy making investment decisions, you might want to consider buying individual shares – but make sure you understand the risks.
  • If you don’t have the time or inclination to be hands-on – or if you only have a small amount of money to invest – then a popular choice is investment funds, such as unit trusts and Open Ended Investment Companies (OEICs). With these, your money is pooled with that of lots of other investors and used to buy a wide spread of investments.
  • If you’re unsure about the types of investment you need, or which investment funds to choose, get financial advice.
Read our independent guide on Popular investments at a glance

6. Check the charges

If you buy investments, like individual shares, direct, you will need to use a stockbroking service and pay dealing charges.

If you decide on investment funds, there are charges, for example to pay the fund manager.

And, if you get financial advice, you will pay the adviser for this.

Whether you’re looking at stockbrokers, investment funds or advisers, the charges vary from one firm to another.

Ask any firm to explain all their charges so you know what you will pay, before committing your money.

While higher charges can sometimes mean better quality, always ask yourself if what you’re being charged is reasonable and if you can get similar quality and pay less elsewhere.

7. Investments to avoid

Avoid high-risk products unless you fully understand their specific risks and are happy to take them on.

Only consider higher risk products once you’ve built up money in low and medium-risk investments.

And some investments are Usually best avoided altogether.

8. Review periodically – but don’t ‘stock-watch’

Regular reviews – say, once a year – will ensure that you keep track of how your investments are performing and adjust your savings as necessary to reach your goal.

You will get regular statements to help you do this. Find out more below.

However, don’t be tempted to act every time prices move in an unexpected direction.

Markets rise and fall all the time and, if you’re a long-term investor, you can just ride out these fluctuations.

9. Be Open-Minded

Many great companies are household names, but many good investments are not household names. Thousands of smaller companies have the potential to turn into the large blue chips of tomorrow. In fact, historically, small-caps have had greater returns than large-caps. From 1926 to 2001, small-cap stocks in the U.S. returned an average of 12.27% while the Standard & Poor’s 500 Index (S&P 500) returned 10.53%.

This is not to suggest that you should devote your entire portfolio to small-cap stocks. Rather, understand that there are many great companies beyond those in the Dow Jones Industrial Average (DJIA), and that by neglecting all these lesser-known companies, you could also be neglecting some of the biggest gains.

10. Be Concerned About Taxes, but Don’t Worry

Putting taxes above all else is a dangerous strategy, as it can often cause investors to make poor, misguided decisions. Yes, tax implications are important, but they are a secondary concern. The primary goals in investing are to grow and secure your money. You should always attempt to minimize the amount of tax you pay and maximize your after-tax return, but the situations are rare where you’ll want to put tax considerations above all else when making an investment decision

Why you should invest in index rather than stocks?

Getting an investment right is often a matter of luck, but most of the time, and resulting in an average of all investment decisions in the medium/long term, most of the time the return obtained is a matter of a well-planned investment strategy.

Investing in stocks, or their collective equivalents such as mutual funds, requires time, knowledge and dedication; at least so that we know with some guarantee what we are investing in, and whether we really have options to see a juicy return in the form of revaluations. But there is another option that, although it may give lower returns than some stocks in particular, offers a much safer return, at least 100% safe from bankruptcies or corporate extinctions. The option is to invest in indices.

Any investment decision requires a thorough analysis: if not, it is better to go to the indices
These Are The Reasons Why It May Be Preferable to Invest in Indices Rather Than Stocks 2
Statistically, for most people, it’s not usually good investment decisions to make when you use the heat of a bubble. Neither are those who simply have the money raising dust (and other people’s profits) in the bank account. And while it is true that each type of investor at each moment of his life has some needs for his savings, which must be translated into a different way of investing them, it is no less true that in the markets, the safest return is in the long term. Security is out of gold fevers that leave more and more victims than the new rich, and requires taking the time to analyze every balance sheet, every company, every market.

But not everyone has the time (or the will) to scrutinize every accounting entry of listed companies that are a potential investment destination. Something similar happens with investment funds that often also require in-depth analysis, at least to know if they are well managed and if their management style is adapted to our needs. Focusing on analyzing for that average investor, with no time or knowledge to analyze beyond a few minutes a day, we always have the indices there.

And how to invest in indices? Well, the truth is that to invest in an index as such, the best option is the quoted funds or ETFs that replicate them. This financial product, which revolutionised the investment market a few years ago, combines very low management fees, real-time trading such as shares, and dividends. Indeed, in addition to today’s topic, index ETFs are an exceptional formula for optimizing the profitability/effort+time equation.

In order for profitability to come to your statement of securities account, all that is needed is for the index to take the bullish path. On this last point in particular, which is the crux of the matter in the end, we can only recommend in general terms that you frequently read serious salmon halves like us, so that you can measure the pulse of the market at any time you need to make an investment decision.

Well, there is an empirical basis for this, but always under the previous premises of needing an investment formula that optimises this exchange of profitability/effort+time. Because obviously, a good investment in the shares that are most revalued in the market will always yield more returns. After all, indices are only a weighted average of the shares that make up the index, and mathematically there will always be stocks with a higher return than the index, but don’t forget: there will also be as many stocks with a much poorer return as the selective (and not selective) ones.

What is more, there will be stocks (and even whole companies) that will disappear from the face of the markets, resulting in a sinister balance sheet of 100% losses for the hardest-hit and most suffering investors. And that is precisely where we would like to focus on today’s issue: it is precisely by investing in indices that you are completely safe from this fateful (but not infrequent) event of corporate deaths.

And to return to the question that led to the last title: yes, there is an empirical basis for affirming that indices are the best neglected investment formula. The empirical basis requires a somewhat lengthy analysis of the life cycle of a selective index. And although we really need a senior index for the temporary sample to be somewhat rigorous, the results are going to be equally worthy of consideration.

The crises we are talking about may no longer be so fresh in popular memory, but I can assure you that both of them have been very dramatic for our socioeconomy (I hope you will at least keep the last one in mind). We are talking about that”.com” crisis that devastated the markets, and the most recent and terrible Spanish real estate crisis.

In the first of these debacles, the”.com” crisis, we must remember how there were prices related to technology that rose like a real rocket: Telefónica was the first of them, despite being a giant. But there were other protagonists in this disaster. Due to the size of our domestic selective, we can only speak of one of these”natos.com” players, unlike other markets such as the US and its large NASDAQ.

This”nato.com” star is Terra, the unsuccessful company that led the.com bubble in Spain, and which even surpassed ENDESA in terms of market capitalisation with hardly any assets and little more than a generic Internet portal. The company, once the flagship of the new economy, was de-listed in 2005 with a 98% drop from highs, and having volatilized the savings of countless small investors. However, the Ibex-35 is still there.

The other major crisis that the Ibex-35 has survived with revenues is the already”fresh” Spanish real estate crisis. Due to the generalization of the bubble within the Spanish economic reality, in addition to the always important relative weight that the construction sector has had in the economy of Spain S.A., in this case we have many more protagonists. The star of this bubble was the vibrant real estate bubble Astroc, overheated where they were, but that gave yields that seemed to be the result of a rocket that was never going to stop rising (like the price of flats). But it ended up going down (and how they did it!), just as some of us predicted.

Astroc’s travel companions were most (if not all) of the rest of the construction and real estate companies. After years of drought in the real estate market, there have been several victims. Disappearances, bankruptcies, mergers for survival have populated the sector of both listed and unlisted companies. Companies such as FCC, which was once a business example of management and profitability, have ended up impoverished and in a situation of weakness, which has taken them out of the selective market in one way or another.

We have analysed the national case of the Ibex-35 because we have to do so, but this temporary sample we spoke of earlier, in the case of our relative Ibex-35, does not meet the minimum standards of statistical rigour that some of us demand of ourselves: it is too young an index. In fact, as I was saying, the Ibex-35 as such saw the light back in 1992, which distances us from its creation for a mere 26 years.

This is really not much in relative terms when compared to longevity and business lifecycles, nor for the average return cycle for savings accumulated over a full working life. The point is that this comparison is so fair in timing that it does not allow for a more extensive comparison, so that cyclical and/or random market and economic events can be ruled out. And it is precisely today that we are dealing with the issue of investment in the long term, with a time horizon of a working life.

But the”truncated” sample of the Ibex-35 becomes revealing in other more senior selectives
These Are The Reasons Why It May Be Preferable to Invest in Indices Rather Than Stocks 7
Fortunately, we have around us other indices with more history than ours, and which are listed in an economic system very similar to the European and Spanish ones. Indeed, I’m talking to you about Comrade Dow. The DWIJ, or Dow Jones Industrial Average, is a selective that was created at the end of the 19th century, more specifically in 1896. Apart from the fact that it is undeniable where the cradle of popular capitalism lies, it is interesting to analyse those 12 companies that were included in the index at its launch, and to know what has happened to them today.

Business Insider recently did this informative analysis exercise in this article. As you may have seen, and as expected, the economic and business reality shown by the analysis of the composition of the index smells like naphthalene. And it is entirely logical, since that original Dow reflects a socioeconomy of almost 125 years ago. This is indeed a truly historic composition. But let’s move on to today’s analysis, and see if it would have been more appropriate to invest in the index, or in stocks, in this sample period.

Investment advices

All analysts point in the same direction: a year marked by volatility and the normalisation of monetary policies. Here are some investment tips for 2018.

As for fixed income, the truth is that it should not be a priority for 2018. However, we have provided some strategies and products to balance our global portfolio with these types of assets.

As far as equities are concerned, experts still have their eye on Europe. This 2018 may come with a few surprises of volatility. For this reason, the best advice is basically active management and diversification.

Interestingly enough, these principles now apply more than ever to bonds.

Debt securities are marked by an expected rise in interest rates in the United States and the start of the normalisation of European monetary policy. This will cause bond valuations to fall.

It is recommended to be very cautious in fixed income this year. This may not be the best time and our portfolios should be focused on equity assets.

Although, without a doubt, a small exposure to this type of assets can provide an added stability in the architecture of the global investment basket.

Several analysts recommend a very active management in this scenario, as if it were equities. Those were the days when bonds could be included in the investment portfolio, time could pass and coupons could be collected, without worrying that the valuation of the assets could damage the assets.

2018 is marked by changes. Changes in monetary policy and the fear of rising inflation.

Strategy and prudence are the best advice that can be given in fixed income for 2018.

But what fixed income strategies work best in such a scenario?

Fixed income investment strategies for 2018

Long-term fixed income exposure is not recommended. These types of assets are more sensitive to inflation and will suffer more from stated intentions to change monetary policy.

There are certain managers who have a clear preference for corporate debt, leaving aside sovereign debt. The objective is clear: if we juggle credit risk, we can achieve greater profitability.

High yield” bonds are an option for those who can afford less risk aversion. Once again, however, we see diversification as the best weapon to combat credit and duration risk.

Let’s see an example of this.

Examples of fixed income products for 2018

Good management and diversification is what defines one of the best fixed income funds. Exactly the recipe so that fixed income (the little exposure we can have in favor of portfolio stability) can be of some use to us during 2018. We’re talking about Gam Star Credit Opportunities.

This fund has an annualized appreciation of 7.72% over the last three years (accumulated return over the same period of 21.93%).

How do you do it? Management, management and more management. Necessary more than ever for fixed income.

With a volatility of only 2.72%, the Gam Star Credit Opportunities, denominated in euros, is investing globally. With a maximum of 20% of the portfolio in securities issued in Emerging Markets (one of the best fixed-income strategies in the scenario described).

Government bonds, subordinated debt securities, preferred stock, convertible securities, corporate bonds and contingent capital notes make up your investment portfolio. Playing this way with credit risk; in other words, diversifying.

The fund has what fixed-income investors need for 2018, a good managerial capacity.

Management capacity and diversification is the best recipe. As the CEO of Tressis Gestión, Jacobo Blanquer, states:”Our clients do not pay us for losing money”. Perhaps this is why the mixed fund it manages, the Adriza Global FI, has little exposure to fixed income and an accumulated return of 36.86% over the last five years.

In short, fixed income is not going through its best times. A small contribution to our portfolio in search of stability is not a bad idea, as we can see from the investment policy of Adriza Global FI. Greater exposure makes it necessary to manage the portfolio with equity strategies.

Investment advice on variable 2018

In line with the above, for 2018, active management of this market is also recommended.

This year has seen a marked increase in volatility, which could jeopardise our profitability if we lose sight of the situation.

Hedge fund

A hedge fund is an investment fund that pools capital from accredited individuals or institutional investors and invests in a variety of assets, often with complex portfolio-construction and risk-management techniques.[1] It is administered by a professional investment management firm, and often structured as a limited partnership, limited liability company, or similar vehicle. Hedge funds are generally distinct from mutual funds, as their use of leverage is not capped by regulators, and distinct from private equity funds, as the majority of hedge funds invest in relatively liquid assets.[4][5]

The term “hedge fund” originated from the paired long and short positions that the first of these funds used to hedge market risk. Over time, the types and nature of the hedging concepts expanded, as did the different types of investment vehicles. Today, hedge funds engage in a diverse range of markets and strategies and employ a wide variety of financial instruments and risk management techniques.

Hedge funds are made available only to certain sophisticated or accredited investors and cannot be offered or sold to the general public. As such, they generally avoid direct regulatory oversight, bypass licensing requirements applicable to investment companies, and operate with greater flexibility than mutual funds and other investment funds. However, following the financial crisis of 2007–2008, regulations were passed in the United States and Europe with intentions to increase government oversight of hedge funds and eliminate certain regulatory gaps.

Hedge funds have existed for many decades and have become increasingly popular. They have now grown to be a substantial fraction of asset management, with assets now totaling around $3 trillion.

Hedge funds are almost always open-ended and allow additions or withdrawals by their investors (generally on a monthly or quarterly basis). The value of an investor’s holding is directly related to the fund net asset value.

Many hedge fund investment strategies aim to achieve a positive return on investment regardless of whether markets are rising or falling (“absolute return”). Hedge fund managers often invest money of their own in the fund they manage.[10][11] A hedge fund typically pays its investment manager an annual management fee (for example 2% of the assets of the fund), and a performance fee (for example 20% of the increase in the fund’s net asset value during the year).[1] Both co-investment and performance fees serve to align the interests of managers with those of the investors in the fund. Some hedge funds have several billion dollars of assets under management (AUM)

Risk management
Investors in hedge funds are, in most countries, required to be qualified investors who are assumed to be aware of the investment risks, and accept these risks because of the potential returns relative to those risks. Fund managers may employ extensive risk management strategies in order to protect the fund and investors. According to the Financial Times, “big hedge funds have some of the most sophisticated and exacting risk management practices anywhere in asset management.” Hedge fund managers that hold a large number of investment positions for short durations are likely to have a particularly comprehensive risk management system in place, and it has become usual for funds to have independent risk officers who assess and manage risks but are not otherwise involved in trading. A variety of different measurement techniques and models are used to estimate risk according to the fund’s leverage, liquidity and investment strategy.Non-normality of returns, volatility clustering and trends are not always accounted for by conventional risk measurement methodologies and so in addition to value at risk and similar measurements, funds may use integrated measures such as drawdowns .

In addition to assessing the market-related risks that may arise from an investment, investors commonly employ operational due diligence to assess the risk that error or fraud at a hedge fund might result in loss to the investor. Considerations will include the organization and management of operations at the hedge fund manager, whether the investment strategy is likely to be sustainable, and the fund’s ability to develop as a company.

Fees paid to hedge funds
Hedge fund management firms typically charge their funds both a management fee and a performance fee.

Management fees are calculated as a percentage of the fund’s net asset value and typically range from 1% to 4% per annum, with 2% being standard They are usually expressed as an annual percentage, but calculated and paid monthly or quarterly. Management fees for hedge funds are designed to cover the operating costs of the manager, whereas the performance fee provides the manager’s profits. However, due to economies of scale the management fee from larger funds can generate a significant part of a manager’s profits, and as a result some fees have been criticized by some public pension funds, such as CalPERS, for being too high

The performance fee is typically 20% of the fund’s profits during any year, though they range between 10% and 50%. Performance fees are intended to provide an incentive for a manager to generate profits.Performance fees have been criticized by Warren Buffett, who believes that because hedge funds share only the profits and not the losses, such fees create an incentive for high-risk investment management. Performance fee rates have fallen since the start of the credit crunch.

Almost all hedge fund performance fees include a “high water mark” (or “loss carryforward provision”), which means that the performance fee only applies to net profits (i.e., profits after losses in previous years have been recovered). This prevents managers from receiving fees for volatile performance, though a manager will sometimes close a fund that has suffered serious losses and start a new fund, rather than attempting to recover the losses over a number of years without performance fee.

Some performance fees include a “hurdle”, so that a fee is only paid on the fund’s performance in excess of a benchmark rate (e.g. LIBOR) or a fixed percentage. A “soft” hurdle means the performance fee is calculated on all the fund’s returns if the hurdle rate is cleared. A “hard” hurdle is calculated only on returns above the hurdle rate. A hurdle is intended to ensure that a manager is only rewarded if the fund generates returns in excess of the returns that the investor would have received if they had invested their money elsewhere.

Some hedge funds charge a redemption fee (or withdrawal fee) for early withdrawals during a specified period of time (typically a year) or when withdrawals exceed a predetermined percentage of the original investment. The purpose of the fee is to discourage short-term investing, reduce turnover and deter withdrawals after periods of poor performance. Unlike management fees and performance fees, redemption fees are usually kept by the fund.

Investment management

Investment management is the professional asset management of various securities (shares, bonds and other securities) and other assets (e.g., real estate) in order to meet specified investment goals for the benefit of the investors. Investors may be institutions (insurance companies, pension funds, corporations, charities, educational establishments etc.) or private investors (both directly via investment contracts and more commonly via collective investment schemes e.g. mutual funds or exchange-traded funds).

The term asset management is often used to refer to the investment management of collective investments, while the more generic fund management may refer to all forms of institutional investment as well as investment management for private investors. Investment managers who specialize in advisory or discretionary management on behalf of (normally wealthy) private investors may often refer to their services as money management or portfolio management often within the context of so-called “private banking”.

The provision of investment management services includes elements of financial statement analysis, asset selection, stock selection, plan implementation and ongoing monitoring of investments. Coming under the remit of financial services many of the world’s largest companies are at least in part investment managers and employ millions of staff. It remains unclear if professional investment managers can reliably enhance risk adjusted returns by an amount that exceeds fees and expenses of investment management.

The term fund manager (or investment advisor in the United States) refers to both a firm that provides investment management services and an individual who directs fund management decisions.

According to a Boston Consulting Group study, the assets managed professionally for fees reached an all-time high of US$62.4 trillion in 2012, after remaining flat-lined since 2007.  Furthermore, these industry assets under management were expected to reach US$70.2 trillion at the end of 2013 as per a Cerulli Associates estimate.

The global investment management industry is highly concentrated in nature, in a universe of about 70,000 funds roughly 99.7% of the US fund flows in 2012 went into just 185 funds. Additionally, a majority of fund managers report that more than 50% of their inflows go to only three funds.

Investment managers and portfolio structures
At the heart of the investment management industry are the managers who invest and divest client investments.

A certified company investment advisor should conduct an assessment of each client’s individual needs and risk profile. The advisor then recommends appropriate investments.

Asset allocation
The different asset class definitions are widely debated, but four common divisions are stocks, bonds, real estate and commodities. The exercise of allocating funds among these assets (and among individual securities within each asset class) is what investment management firms are paid for. Asset classes exhibit different market dynamics, and different interaction effects; thus, the allocation of money among asset classes will have a significant effect on the performance of the fund. Some research suggests that allocation among asset classes has more predictive power than the choice of individual holdings in determining portfolio return. Arguably, the skill of a successful investment manager resides in constructing the asset allocation, and separate individual holdings, so as to outperform certain benchmarks (e.g., the peer group of competing funds, bond and stock indices).

Long-term returns
It is important to look at the evidence on the long-term returns to different assets, and to holding period returns (the returns that accrue on average over different lengths of investment). For example, over very long holding periods (e.g. 10+ years) in most countries, equities have generated higher returns than bonds, and bonds have generated higher returns than cash. According to financial theory, this is because equities are riskier (more volatile) than bonds which are themselves more risky than cash.

Diversification
Against the background of the asset allocation, fund managers consider the degree of diversification that makes sense for a given client (given its risk preferences) and construct a list of planned holdings accordingly. The list will indicate what percentage of the fund should be invested in each particular stock or bond. The theory of portfolio diversification was originated by Markowitz (and many others). Effective diversification requires management of the correlation between the asset returns and the liability returns, issues internal to the portfolio (individual holdings volatility), and cross-correlations between the returns.