The long-term index investing strategy is great for young investors or those who are new to the investing world itself. It’s also great for those that are more experienced in life or who are closer to retirement. The strategy offers a conservative approach with low maintenance and a low amount of stress associated with it. If you were to compare it to day trading or swing trading, long-term investing has a much higher success rate and this is backed up by a proven strategy with historical data as evidence. Let’s go over how the long-term investing strategy works.
Volatility and Diversification – How the Investing Strategy Works
Now when we talk about long-term investing especially on the website we are investing in exchange traded index funds otherwise known as ETF’s for the most part. When you purchase an ETF you reduce volatility and increased diversification. If you were to look at an example where you purchase one stock which represents one company. If that one company were to fail you would greatly feel the effect in your overall portfolio. Consider purchasing one ETF in place of that one stock. The ETF would have many companies representing it. Many have over 60+. If one of those companies were to fail, you would to a much lesser extent feel the effect if even at all.
Law of Averages – How the Investing Strategy Works
In long-term investing we heavily rely on the law of averages. This is where we look at the history and statistics. The law of averages means that over a specific amount of time, we can expect a certain amount of growth out of each of the ETFs. In general, we are expecting about a 6 to 7% rate of growth per year. This value is relying on a key indices such as the Dow Jones, S&P 500, TSX and there’s many more. In day trading or swing trading, investors heavily rely on timing the market where in long-term investing that’s not what we want to do at all. When we have money we want to buy. We don’t need to worry about if the market is doing well or if it’s over / under bought. We simply just place our money into our investments and hold them over long periods of time. In doing so, we reduce the amount of stress while reducing the required maintenance. You don’t need to consider or have any thoughts about what’s going on in terms market performance and how your investing decisions would affect your overall portfolio.
Required Maintenance – How the Investing Strategy Works
In long-term index investing, the only required maintenance is known as re-balancing our portfolios. Re-balancing your portfolio must be done according to your pre-determined investing plan. Re-balancing a portfolio requires selling off assets that are high performers and purchasing those assets that are actually weaker performers. For many this goes against what you would think is best emotionally but most know the whole rule of investing is, you sell while assets are high and you buy while assets are low. As assets are increasing in value, you sell them off and then purchase other assets that have been suffering in performance. This major milestone in your long term investing strategy balances out your portfolio in order to achieve your original asset weightings. This proven maintenance requirement forces us to make correct adjustments to our portfolio. In the long term, re-balancing makes your portfolio overall more effective. This is really the only amount of Maintenance that is required and you only perform this step following your long term investing plan.
Eliminating Emotion – How the investing Strategy Works
Bitcoin is a hyped strategy filled with trying to get in before it’s too late. When you look at long-term investing, long-term investors rely on a plan. They do not make decisions using emotion, all investing decisions follow the initial investing plan. As soon as you allow emotion to get the better of you, that’s when your Investments start to suffer. Long Term index investing eliminates emotion from the equation. This is one key area on how the long term investing strategy works leading to success.
Conclusion – How the Investing Strategy Works
In conclusion, what makes the long term investing strategy work is a combination of many items. Firstly, we are following a plan that has dedicated rules that are setup for success. Secondly, we can predict our results based on proven history and statistics. This is where the index investing portion is important. Thirdly, we have a proven maintenance requirement that forces us to make the correct adjustments to our portfolio. Lastly, the long term investing strategy works successfully by removing emotional decision making from any part of the process. A more technical approach to investing has shown to be most effective.