3 Rules for Successful Long-Term Investment Growth
Investment growth takes time. Have patience and follow the rules.
Investing for growth involves purchasing something that will appreciate in value. Real estate, stocks and business ownership are the most common forms of growth investments.
No matter what your age, part of your portfolio should be allocated toward investment growth. For those within 10 years of retirement, the right amount would be somewhere between 60% - 80% of your portfolio.
To have a successful experience investing for growth, follow these 3 rules.
1. Invest for the Long-Term
Long-term means when you buy something for the purpose of investment growth, you need to plan on owning it for at least 10 years.
Statistics tell us that 70% of the time the stock market will have a positive calendar year return; 30% of the time it will be negative. Pretty good odds! You can play these odds by buying an index fund, which owns all the stocks in the S&P 500 Index.
But they key is owning it for a long time. Out of every 10 years, expect 3 to 4 of them to have negative returns. That could happen the very first year you invest. It doesn't mean you won't see growth. That's just the way it works. Stay invested, and the investment growth that occurs in the positive years will outweigh what happens in the negative years.
If you buy an individual stock, these odds don't apply. An individual stock may do even better than the market as a whole, or it may do much worse. Some companies go bankrupt, and the stock becomes worthless. Others do exceptionally well. An index fund owns all of them, so you experience the collective results.
2. Invest. Don’t Speculate.
People lose money in the markets every day. Why? They are speculating; not investing.
Speculators try to time the markets to make a quick profit. They may win big; or they may lose big. This is not the strategy to take with your retirement money. Investment growth does not occur from speculation; it occurs from buying an asset that, over time, will appreciate in value.
Take the time to learn how the investment will grow. This means you must understand what you own. I prefer to classify investments on a risk scale of one-to-five. Speculative investments are a "5" and ultra-safe investments are a "one". Ranking choices on this scale can help you see how much risk you are taking.
Stocks aren't the only place people speculate. It applies to real estate too. You can try to flip a home quickly and make a quick buck, or you can invest for the long haul. Speculating always has more risk and for inexperienced investors who aren't skilled at evaluating risk as it relates to an overall portfolio, the results can be detrimental to long-term wealth.
If you put your assets in a single stock, or a single piece of property, you might as well go to Vegas. This is like betting, not investing.
Long-term investment growth is achieved by setting up a disciplined approach to invest systematically across stocks and real estate in a diversified way. Diversifying means owning different types of investments, both safe ones and growth-oriented investments, and owning things that don't all react to market and economic news in the same way. Using this approach means you are following Modern Portfolio Theory, and it has been proven to be effective.
If you’re investing in stocks, use index funds so your money is spread out across thousands of stocks.
If you’re buying real estate, set up plan to buy smaller, affordable investment properties, rather than putting all your money into one large piece of property.
You will achieve long-term investment growth if you patient, thoughtful, avoid the temptation to speculate, and diversify your investments.
Gambling a small chunk of change while on vacation might be fun but that's no way to treat your retirement or family fortune.
In 2017 and early 2018, as Bitcoin rose in value, inexperienced investors saw an opportunity to make a lot of money quickly. Some even took out a second mortgage on their home to invest. Not long into 2018, the value of a Bitcoin had dropped from $20,000 to $8,000. People who followed the hype found themselves on the losing side of the bet.
Unless you have a lot of experience in the investment markets, work with somebody to help you invest your family's financial nest egg. And if you want to have a little fun as a speculator, confine that to a few thousand at most.