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.
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
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
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
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
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
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
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
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.
Investments
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.
Financial Planning
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.
1222-2BP1Introduction
I am an expert in portfolio management and investment strategies. With years of experience and a deep understanding of the subject, I can provide you with valuable insights and guidance to help you plan your long-term investments effectively.
Concepts Related to Portfolio Management and Investment Strategies
Here are the key concepts mentioned in the article and their explanations:
-
Long-term investment strategies: These are approaches to investing that focus on achieving financial goals over an extended period, typically several years or decades. Long-term strategies often involve diversification, asset allocation, and a focus on fundamental analysis rather than short-term market fluctuations.
-
Investment goals: It is crucial to define your investment goals before choosing the right strategies. Examples of investment goals include buying a house, saving for retirement, maintaining a certain lifestyle, or building a legacy for your children. Different goals may require different investment strategies and products.
-
Risk tolerance: Risk tolerance refers to an individual's ability to withstand fluctuations in the value of their investments. It is important to assess your risk tolerance objectively, considering factors such as your financial situation, investment knowledge, and emotional response to market volatility. Understanding your risk tolerance helps you determine the appropriate level of risk to take in your investment portfolio.
-
Diversification: Diversification is a risk management strategy that involves spreading investments across different asset classes, industries, and sectors. By diversifying your portfolio, you reduce the impact of any single investment on your overall returns. This strategy aims to capture potential growth opportunities while mitigating the risk of significant losses.
-
Adjusting investment strategy: Markets and economies are dynamic, so it is essential to periodically review and adjust your investment strategy. This doesn't mean making frequent changes but rather questioning your assumptions and beliefs to ensure your strategy aligns with your goals. Flexibility and adaptability are key to optimizing your portfolio's performance over the long term.
-
Long-term perspective: When investing for the long term, it is important to avoid being swayed by short-term market volatility. Intraday price fluctuations should not significantly impact your long-term investment returns. Maintaining a long-term perspective allows you to stay focused on your goals and avoid making impulsive investment decisions based on fear or greed.
Conclusion
To effectively plan your long-term investments, it is crucial to have a clear understanding of your investment goals, risk tolerance, and the key principles of portfolio management. By considering these concepts and implementing appropriate strategies, you can align your investments with your objectives and increase your chances of long-term success. Remember to periodically review and adjust your investment strategy to adapt to changing market conditions and optimize your portfolio's performance.