How to make long-term investing more profitable? Here are 6 ways

Pranati Deva
Updated: 14 Dec 2021, 05:13 PM IST
TL;DR.

Long-term investment mostly always gives better returns than a short-term investment. Let's look at how we can make it even more productive.

A long-term investment is about building a portfolio that will help you with your future needs.

A long-term investment is about building a portfolio that will help you with your future needs.

Whether you are an experienced investor or just starting, long-term investment is a popular and safer choice for everyone. Even though short-term investment sounds enticing as you will get your returns sooner, it is more likely for you to generate better returns in the longer run.

A long-term investment is about building a portfolio that will help you with your future needs. It could be anything from a cushion for retirement to saving for college, buying a house, etc. After you have put in an investment for say 10 years, the return you receive will assist you later in life.

In this kind of investment, you can take a certain amount of risk in order to get higher returns since there is time for recovery if things don't go as planned. You can invest in high-risk high-reward assets like stocks, equity funds, commodities even cryptocurrency.

Stocks, as well as equity funds, generally are one of the best long-term investments because of their capital appreciation potential.

Let's look at how you can make this happen:

Start investing as early as possible

Patience is a virtue. The longer your money is invested, the more potential it has to grow. Investors who start early and stick to a long-term investment strategy usually get great returns. This gives your portfolio ample time to recover from any losses. Stocks can give multibagger returns if invested for a longer term. Even in the case of equity funds, since the interest is compounded, the interest generated in 10 years will any day be higher than 3 or 5 years.

Invest in themes you know

It is very important to invest in themes or businesses you understand clearly. This helps you get a clear view of the trends going on in those as well as analyse their fundamentals well. If you do not understand the businesses, then it will be difficult for you to distinguish between useful information and noise. It is pertinent for you to stay away from themes you find complex and tricky.

Stick to your money management plan

Another important element for long-term investment is to make a cash flow plan that agrees with your financials and stock with it. It is a very important component of portfolio management. In your working years invest the maximum amount you can (which will not be needed for at least 3-5 years) each month automatically. Make it a habit and do not miss the payment. You can slowly start to increase that amount as your salary rises. If you stick to your cash management plan, you have a very good chance of reaching your financial goals.

Diversify

Diversification is another key part of long-term investing. do not put all your eggs in one basket. Invest across various asset classes like stocks, bonds, commodities, mutual funds, etc as well as diversify within asset classes. For example, if you are interested in an investment in stocks, do not just invest in 1 or 2 stocks. Choose stocks from various sectors, market capitalisation, some high-risk stocks, some quality stocks, etc to make a diverse portfolio. Same in the case of mutual funds as well. You can invest in index funds, sector funds, debt funds. Although it does not guarantee against loss, it is the most well-sorted way of reaching long-term financial goals while minimizing risk. Generally, the bond and equity markets move in opposite directions, so if your portfolio is diversified across both areas, volatility in one will likely be offset by positive results in another. A combination of asset classes should reduce your portfolio’s sensitivity to market swings.

Do not time the market

Timing the market is a process when you buy and sell equities in the short term based on the market swings. You try to make the most of the highs and avoid crashes. However, this is an extremely risky strategy and can easily backfire. If you sell a stock when it is falling, you will lose out on gains when it outperforms. Keeping your investment untouched even through difficult times in the market tends to be a more rewarding strategy than trying to time the market. Even a small mistake in timing the market can lead to huge losses. It is always better to ride the storm than trying to milk it for opportunities.

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How to make long-term investment more rewarding

Rebalance and review

At least once a year it is important to rebalance your portfolio, adjust the weights, weed out the underperformers. Market volatility can mess with your asset allocation, hence it is important to readjust your portfolio as per your goals and risk appetite. One must also note that rebalancing is more crucial in portfolios with goals less than 10 years since there isn’t much time to recover from massive losses over a shorter period of time. In case of a longer period like say 20 or 30 years, your portfolio is likely to react less to market volatility.

Where can you invest

There are a number of investment instruments and opportunities you can look at if you are considering a long-term investment. You can invest in value stocks, which are currently undervalued by the market but have strong fundamentals to outperform in the long run, or quality stocks that already have established a good rapport and give consistent stable returns. You can also look at mutual funds like index funds, sector funds, multicap funds, blue-chip funds. These can also generate robust returns in the long term. If you want no risk at all, you can look at government schemes like PPF, FD, NPS (for retirement), etc.

Long-term investment mostly always gives better returns than a short-term investment. Make a proper financial plan, set a target, choose your portfolio and start investing.

First Published: 14 Dec 2021, 05:13 PM IST
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