How to become a successful long-term investor

We explore eight simple tips to help you become a successful long-term investor.

Investing is often considered rather complicated. The sheer choice of options available, coupled with markets that are moving continually, can make you feel that you need a lot of time and expertise to make it work.

But successful investing can be pretty straightforward. You don’t need to spend hours, days, or weeks researching the best investments, and nor do you need to constantly monitor the markets.

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Here we explain eight straightforward strategies that can help every investor improve their returns.

1) Set a goal

Goal-setting is a really important part of financial planning. Whether it’s something specific such as getting the kids off to university or a more general feathering of your nest, a goal focuses the mind.

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Having a vision of what that pot of money is for will encourage you to regularly monitor its performance, think about target returns, your investment timescales and the level of risk you’re prepared to take. It will also help you choose the right investment for the job.

2) Start early

The longer you’re able to give yourself to reach your investment goal, the more likely you are to achieve it and the less money you’ll need to put away. The longer your investment horizon, the more you are able to capitalise on the magic of compounded returns. This is where you start earning returns on not just your original capital, but the money your capital has earned.

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Of course, it’s not really magic, it’s maths, but nonetheless you might be wowed by the difference it can make to your returns. Take a 5% return on £1,000. In year one you’ll make £50. Not much to get excited about, but as your capital grows, so too will your returns. By year 10 you’ll have made close to £630 but after 20 years you’ll have a gain of over £1,650, without investing anything else.

3) Hold your nerve

Volatility is part and parcel of investing. Of course your goal is to increase the value of your investments, but there will be times when its value drops. As recent times have repeatedly shown, there will also be ‘market corrections’ – usually considered to be a drop of 10% or more.

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But, so long as you have time on your hands and your portfolio is sufficiently well balanced, you should be able to ride out the volatility and see the value of your investments rise over the years. Panic and sell after your first correction, and all you’ll do is lock in your loss.

4) Diversify, or don’t put all your eggs in one basket

To ensure you aren’t thrown into a state of panic every time the value of an investment falls, it’s also important to think about asset allocation – that is how your money is spread across a range of different investments. This includes having money held in cash, fixed interest and equities. Within equities it can also help to ensure you have money spread across a broad range of companies in multiple countries.

Different investments will perform better in different market conditions, so if one particular holding suffers, it doesn’t necessarily mean the rest will.

Building a diversified portfolio might sound complicated, but it doesn’t have to be. Lots of funds are designed to be core holdings - or one-stop shops - that offer access to a broad range of international companies or combine equities with lower-risk fixed interest.

5) Don’t let your heart rule your head

Your heart might rule your personal life, but as far as your investments are concerned it needs to take a back seat. Every holding in your portfolio needs to earn and justify its position. Before you make any investment decision, it’s worth standing back and looking at the bigger picture. Are you making a ‘clinical’ decision based on facts, or are you being driven by emotions such as fear, greed or even sentimentality?

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Taking the time to think about this could stop you panic-selling in a downturn or rushing to buy at the top of the market. This approach should also mean you don’t form emotional attachments to investments and hold on to ones that are no longer serving the purpose you need.

6) Invest regularly

Investing lump sums into the market can be daunting – a significant drop could see you lose a lot of money quickly and force your capital into recovery mode. You’ll have less of a roller-coaster ride by drip-feeding your money into the markets each month.

This approach allows you to take advantage of pound-cost averaging, where you buy your units over a period of time and end up paying an ‘average price’ over that period. Even when markets are down you can benefit by snapping up more units at a lower price and increasing your holding before they bounce back.

This can boost your returns when markets are volatile, the catch is that you can miss out on some gains when markets are on a more consistent upward trajectory.

Returns aside, a key benefit of this approach is that it helps with tip number five, and takes all emotion out of the buying process. By setting up a regular payment schedule you are spared the pressure of timing the markets and can build up a healthy investing habit. Many investors will monitor markets and try to single out the best moment to buy, but it’s a riskier approach and not even the experts get it right all the time.

7) Rebalance your portfolio

When you first built your portfolio you might have only had 20% in fixed interest or 30% of your equities in the US. But different investments will grow at different rates, and as time passes you could find that your asset allocation has shifted and that your overall portfolio no longer matches your intended risk profile. That stake in the US may have grown to 40%, or you could now have just 10% of your portfolio in fixed-interest.

Rebalancing involves selling some of your assets that have surged ahead and redistributing the proceeds in your other investments. This process ensures you don’t inadvertently end up taking too much or too little risk. As your investment goal draws closer, you may also choose to reduce the risk profile of your portfolio by moving more money into lower-risk investments. This can limit the damage if there’s a market correction right before you need the money.

8) Don’t forget charges

A percentage point here and there might not look like much, but over time they can place a real drag on your returns. Actively managed funds are much more expensive than passive options – there’s nothing wrong with this approach and some managers will achieve stellar returns. Nonetheless, it’s a good idea to compare performance of active funds against their index to ensure that you’re getting enhanced performance for your higher charges. There’s no point paying over the odds for average performance.

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The same goes for your investment platform – always find out how much you are paying and compare cheaper alternatives. Bear in mind that with a fixed fee, your charges won’t rise as your investments grow.