How to start long-term investing

What is the goal of long-term investing? 

Investors hold long-term positions because they believe the security’s value will increase over time. Let’s take a real-world example to illustrate this point. People invest in classic cars because they believe the asset has an inherent value that will push up the price. 

Rarity, age and desirability contribute to this inherent value. The older a classic car gets, the rarer it is and, to some people, the more desirable it is. Of course, there are other factors to consider, such as the car’s condition and the market. However, it’s the car’s fundamentals that long-term investors consider first. 

This is the same as a long-term investor buying stocks. They’ll assess the fundamentals of a company, what it offers, its market position/potential, and its financials. If these qualities suggest it will grow over time, it could be worth buying and holding stock. Again, present variables, such as market conditions, are also important. However, a lot of weight is given to the company’s fundamentals when a trader assesses its potential. 

Now, it’s also possible to hold long-term short positions. A short position in investing is where you’re speculating that a security’s value will decrease. You can hold a position like this for a long period of time. However, this can be a risky strategy because of the potential losses you can incur with short positions. Therefore, it’s not as common to see this strategy. 

Many investors think of long-term investing as holding positions in securities they expect to increase in value over time.

Long-term investing vs. short-term trading 

Another useful way to define long-term investing is to outline what it’s not. We can do this by comparing it to short-term trading and the ways people typically use this strategy. For context, short-term trading involves opening and closing positions multiple times per hour/day/few days.

Basically, you never hold a security for an extended time because the ultimate aim is to capitalise on short-term price fluctuations.

Because of this, short-term traders, such as day traders, may use contracts for difference (CFDs) to go long or short, but CFDs are complex instruments and can involve leverage, which can magnify losses and may not be suitable for all investors.

Short-term trading can be a riskier way of playing the financial markets because you’re aiming to predict swings before they happen, i.e., you’re trying to get ahead of the curve. However, outcomes are uncertain and losses can be significant.

Now we’ve given you a basic definition of short-term trading. Here’s how it compares to long-term investing:

The role of fundamental analysis in long-term investing

We’ve said that fundamental analysis is an important weapon in the long-term investor's arsenal, but what does that mean? Fundamental analysis is a strategy that aims to determine the intrinsic value of an asset. Doing this requires an investor to review financial statements, price trends, and industry trends. 

For example, if you’re conducting fundamental analysis on Amazon stock, you’d first look at the company’s revenue reports. Public companies publish quarterly and annual reports and other disclosures; some companies also provide guidance, but this varies. Annual reports are published separately from quarterly reports. 

The information in these reports is used to assess the financial strength of a company and its business practices. If Amazon’s quarterly earnings reports show consecutive revenue increases, that’s a potentially positive sign. 

You can also assess what the company is doing with its revenue. How much is being reinvested? Is it building innovations or venturing into new markets? How much money is being paid in dividends? 

These things matter because they can influence how successful a company is. On top of these intrinsic qualities, it’s important to consider the whole market. For example, if the retail industry is booming, Amazon is likely to be in a strong position. Conversely, if there’s a recession, Amazon stock could suffer. Considering the external conditions should be secondary. 

If the company’s fundamentals are strong, it may be better positioned over time, but share prices can still fall significantly. That’s what fundamental analysis aims to discover. If the company’s inherent qualities are solid, it could be a good long-term investment if its value increases over time, but market swings can still affect returns.

Long-term investing strategies

We know that long-term investing is about analysing your options, choosing securities you believe will increase in value and holding for an extended period of time. That’s the basic strategy, but you can’t allow your portfolio to stagnate. Long-term investors may choose to close existing positions and open new ones if their objectives change or an investment no longer fits their strategy. 

Doing this requires you to have a diverse portfolio. You could focus on stocks if that’s your preference. You can hold stocks in a single company if that’s your preference. However, many long-term investors consider holding multiple securities at once.

This could be holding stocks in multiple companies. It could mean holding stocks, some commodities, and having an interest in a few indices.

There are two reasons to diversify: 

1. A diverse portfolio can help spread risk. There will be times when some securities are making a profit, and some aren’t. A diverse portfolio can help reduce the impact of losses in one area, but gains may not offset losses and you can still lose money overall.
   
   
2. A diverse portfolio allows you to move in and out of positions. When you’ve got a variety of securities, you can assess your portfolio and make adjustments as required. If one security isn’t performing as well as the others, you can swap it for something else. When you hold one security, all of your risk is tied up in it and that can make it harder to change when things aren’t going well. With multiple securities, you’re not necessarily as emotionally or financially invested in a single one and that makes it easier to remove from your portfolio.

Long-term investing can be one way to approach the financial markets, but returns are not guaranteed.  There are risks with any investing strategy, regardless of whether you hold assets for long or short periods of time. However, with the right analysis and not putting in more money than you can afford, there is potential.

The goal is to find securities you believe have inherent value and can hopefully also increase in value and weather any storms. If you can stick to your beliefs and not allow swings to deter you from a long-term goal, long term investing could be the investing strategy for you.