Ten Things To Consider When Investing (for the long term)
Investing is hard!
There are so many things making investing complicated these days - inflation, the Fed raising interest rates (thanks, Jerome Powell!), foreign wars, and so much more.
What makes investing hard, especially now is the idea that these things are out of our control. We have no say in changing the outcomes of these events and their impact on our investment returns. What we can do, however, is focus on those things within our control when it comes to investing.
Having a framework to understand what, why and how long you're investing can help anyone overcome the vagaries of volatile markets for stocks, bonds, and real estate. With that said, here are ten things to consider when investing in any asset class for the long term (i.e., more than six months):
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1. What asset(s) are you investing in?
Are you investing in stocks, bonds, real estate, and crypto assets? Or a combination of all of these? Putting together a portfolio of assets that change in price differently from one another over time will help smooth some of the big changes that can come with investing in just a single asset class like stocks.
2. Why are you investing in asset(s)?
Are you investing for income? For capital appreciation? Or both? Knowing why you've invested in an asset or multiple asset classes will help you remove the temptation of prematurely selling an asset due to volatile market conditions.
3. How long are you planning to invest in an asset/assets?
Knowing how long you plan to hold an asset is key to minimizing the impact of taxes on your portfolio's returns. As a general rule, the longer you hold onto an asset for investment, the less likely the investment's returns will be affected by taxes. Check with your tax accountant to determine how tax rates can affect your investments based on your holding period.
4. Who are you investing for?
Are you investing for yourself? Your family? A charity or non-profit institution? When you understand who you're investing for, knowing this can change the types and amounts of assets you plan to invest in. Having a game plan of who benefits from your investments will impact how you invest in assets for the period of time you plan to hold them.
5. Where are you investing in assets?
The type of account you invest in assets with can impact your portfolio's returns. A taxable account will offer you different return considerations than say an IRA or a trust account. Understand the different types of accounts available for investing and chose the one that best suits your needs.
6. What's your risk tolerance for investing?
Risk is the potential for permanent loss of capital. If you're not comfortable with an asset that has the potential for a loss of 25% or more over a given period of time, maybe you shouldn't be invested in that asset class. Understand how much of a loss you're willing to take on investment without losing sleep over it.
7. How liquid is the asset you're investing in?
Selling is hard. What makes selling harder is when the assets you own don't have willing buyers to sell them to. Trying to sell a house today is a heck of a lot harder than it was six months to over a year ago! Think carefully about how quickly you can sell an asset when the market for that asset goes south. The more quickly you can sell an asset for cash, the better you'll feel when holding the asset for the long term.
8. What's your strategy for investing in an asset?
Having a game plan on how to buy an asset is the difference between speculating and investing for the long term. Using something simple like dollar cost averaging into assets like crypto or stocks can help mitigate the potential for loss when making all-or-nothing investments in those assets. Buying assets through their ups and downs in price will lower your overall average purchase price. Some assets, however, like housing, cannot be bought using a dollar cost averaging method. Consult with a tax advisor or accountant to see what strategies of investment will lower your cost basis based on your taxable income and the asset you wish to own.
9. When should you sell your investment?
The only time to sell an investment in an asset is when the fundamentals of the asset have changed. For example, if I own a house in a flood zone and I find that my property insurance company will no longer cover flooding for the home I own, I might want to start thinking about selling my home and moving to an area that is less flood-prone. The same sort of thinking can be applied to assets from stocks to crypto. Understand what are the dynamics of an asset that can significantly lower its value over time permanently and then act accordingly.
10. Are you OK?
Feelings, woah-woah-woah, feelings!
This is the most important factor to consider of all of the elements above. Our feelings about ourselves change from day to day. One minute, we're on top of the world, the next minute, we're in the valley of despair. How we feel about ourselves on any given day can impact how we invest.
If we're feeling bad about ourselves, we might not be in the best frame of mind to make serious decisions about our investments, no matter how well they may be performing. If we let our emotions get the best of us based on the daily drawdowns that we see in markets from stocks to crypto, we may be tempted to sell the assets we own at the least opportune time!
Don't do it!
Instead, you may want to consider using automated strategies investing so that your emotions don't get in the way of potentially positive returns. Automated investing strategies can take some of the guesswork on when to buy or sell an asset that you're investing in for the long term. Look around on the internet for firms that specialize in automation of investing across different assets if you're not up keeping your emotions in check.
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These are my ten tips to help you become a better long-term investor in any asset. Always remember that price, time, and taxes are the three most important things to consider when investing in any asset class for the long haul. The more you think about and act on the things I've mentioned above, the better your chances will be for generating positive returns on your investment portfolio for whomever you're investing for be it yourself or your family's future.
Thanks for reading - here's hoping your next investment is a profitable one!
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