Historically speaking, the markets have continued trending upward in the long-term —despite short-term volatility. We believe sticking to a long-term investing strategy should allow your portfolio enough time in the markets to recover from short-term volatility, and hopefully gradually increase in value over time.
For many investors, however, this can be easier said than done. Just think back to recent events and how much uncertainty they created in the markets and the broader economy — the onset of Covid-19, the 2008 financial crisis, the dot-com bubble burst, and so on. When your previously well-performing portfolio experiences a major downturn, it can certainly test your own resilience and commitment to long-term investing.
To help you stay focused on your future goals through the ups and downs of market movements, we’ve gathered up a few of our top tips for establishing and maintaining a long-term investment strategy.
In our opinion, the best long-term investing strategy is the one you’ll stick with in bad times and good. We think these tips can help you achieve that.
“Be fearful when others are greedy, and be greedy when others are fearful.” —Warren Buffett
As you play out your investment journey, you might find it’s easier to quote Warren Buffett than it is to actually live by his words. As with anything else in your life — your career, health goals, relationships — it’s better to be realistic and imperfect than to set unattainable standards.
If you’re honest with yourself from the start, we believe you should be more likely to stick with your strategy. Otherwise, you may feel like you’re constantly falling short or tempted to abandon ship at the first sign of trouble. Try and set realistic expectations regarding what you’re comfortable investing in, how much risk you’re really able to take on, and how long it might take you to achieve your goals.
In 1995, the S&P 500 hit a 50-year record high of 37.2% in annual returns — more than triple the 10.26% annualized average return rate.1 As investors, we don’t plan for exceptionally high returns. Rather, it’s more realistic to assume your investments will match the market. (Even if your goal is to beat the market, this isn't easy to accomplish).
When you anticipate an average year of returns, you’re setting more realistic expectations for your future financial goals, like creating income for retirement. Of course, those years with exceptionally high returns (like 1995) are always nice to come by and serve as an added bonus to fast-track your other goals (say, home-buying or paying down debt).
Similar to maintaining your expectations of the markets, consider how you’ll react in the wake of a dramatic loss. Just as it’s possible for the market to exceed expectations, it can easily miss them as well. In 2000, the S&P 500 returned -9.03%. In 2002, it was -21.97%. And during the 2008 financial crisis, it dove down to -36.55%.1 For millions of investors, it was painful watching their portfolios drop so drastically in value, and many likely pulled out before there was time to recover (which, as historical data has shown us, generally happens within a few years). This is why understanding how you react outside of "normal" market movements is so important to sticking to your long-term plan.
How you think you’ll react to a sudden market downturn and how you’ll actually react in the moment are often two different things. In theory, you may understand the importance of weathering the storm, but the reality of watching your portfolio lose value overnight can be too stressful for some people to handle.
It’s important to understand your natural inclinations and reactions to watching the market move in ways you don’t want it to. And the reality is, you likely won’t have to wait too long for the next bout of market volatility to hit. In any given year, you’ll likely experience at least some level of volatility, even if it isn’t as dramatic as what we saw during the onset of Covid-19 in 2020 or the housing crash of 2008.
Use the smaller market upsets to help you gauge your reactions. You may find during those moments that your tolerance for risk is actually lower than you expected — meaning you’d rather avoid seeing such losses by moving to more conservative investments, even if that limits your potential for future growth. If that’s what’s going to keep you invested long-term (as opposed to pulling your money out altogether during a downturn), then that’s an important insight to know and build into your investing strategy.
Similar to what we mentioned above, try to reflect on your past behaviors and use that to consider your future behavior — since that’s likely how you’ll react during the next downturn or bear market as well.
Your reaction to volatility is based on how you’re wired and your experiences. It depends on how your family viewed money growing up, what sort of values and philosophies you believe in, and other factors. That doesn’t mean it’s a good or bad, but rather that your views about money should be embraced with both hands, because that’s who you are.
There’s no rule saying you must have a certain tolerance for risk, and there’s nothing wrong with you if you’re naturally averse to risk, either. What’s important is that you understand your potential limitations or biases, and address them when navigating your investment decisions moving forward.
For example, some people have a behavioral bias called loss aversion, which means they’re so fearful of losing that they’d prefer to avoid the potential loss altogether — even if it means missing out on gains. In other words, they have a stronger emotional reaction to experiencing a loss in their portfolio than high returns. The risk with this type of bias is that investors may hold onto their losses for longer than they should, because the loss isn’t actually realized until the investment is sold.
If you’re someone who’s experienced a serious portfolio drop in the past, you may be more prone to loss aversion than those who have only enjoyed generally positive market trends. As a result, you may be more likely to opt for investments that fall on the lower end of the risk spectrum, such as bonds, fixed income, or cash equivalents.
Understanding what underlying biases are impacting your decision-making is important, as these behaviors or biases, like loss aversion, may make it more difficult to stick to a long-term strategy through varying market conditions.
If you think you may have a hard time sticking to a long-term investment strategy, especially as the markets move up and down, passive ETFs may help. Once you do your research and select what’s best for your portfolio (based on your risk tolerance and goals), you can step back and allow your investments to move over time.
Passive ETFs make long-term investing more accessible, streamlined, and straightforward for everyday investors to accomplish. Unlike mutual funds or direct indexing, you don’t have to meet high account minimums or net worth requirements — as long as you can purchase a share of an ETF, you’re able to invest.
ETFs were originally designed to replicate an index, both in how they’re composed and the specific stocks they include, although today you’ll find ETFs that are concentrated in specific sectors (such as energy, healthcare, tech, etc.), asset types (stocks, bonds, currencies, or commodities), or countries of origin.
Here are a few specific reasons why we feel ETFs are especially advantageous for investors looking to follow a long-term strategy:
An ETF is essentially a wrapper that contains multiple shares of underlying stock. While you’re purchasing a share of the ETF itself (as opposed to the underlying stocks), you’re gaining exposure to multiple investments — perhaps even multiple asset types or sectors. In essence, an ETF has some level of built-in diversification, which can make it easier for investors to avoid overconcentration in their portfolio. This can be critical for mitigating market risk.
ETFs are overseen by portfolio managers who will both track the intended index or sector and rebalance the underlying shares accordingly. While passive ETFs aren’t adjusted as often as their active counterparts, they are rebalanced on a regular basis — typically quarterly, though it could be more often depending on the type of ETF.
Compared to mutual funds, passive ETFs are generally more cost-efficient. There tend to be fewer transactions in a buy-and-hold strategy, and the portfolio manager or fund analysts aren’t typically monitoring/adjusting the ETF as frequently as they would be with an active fund, either.
It’s important to understand the ongoing operating costs of any investment, like an ETF, as these will impact your returns over the lifetime of the investment.
While it’s wise to check in on your portfolio from time to time, an ETF won’t require the same level of attention and oversight as other strategies — namely, purchasing individual shares of stocks. The portfolio manager will rebalance the underlying funds on a regular basis, and you can monitor your ETF(s) performance and tracking quality (how closely it mimics the index) from your brokerage platform.
While many investors understand the importance of a long-term strategy in achieving their greater financial goals, putting those theories into practice can prove more difficult than expected. Even the strongest investor is often put to the test at least a few times in their investing career — especially when the markets go south and the headlines get a little scary.
But when you’ve taken the time to really think through your investing strategy and build out a well-diversified portfolio reflecting your risk tolerance and time horizon, we believe you’re in a better position to ride out market changes over the long run. Along your journey, you may find certain investment products, like passive ETFs, to be helpful in sticking with your long-term strategy.