4 Best Strategies To Build Wealth With Long-Term Investments

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Just about anyone on any budget can become an investor thanks to no-fee brokerages and fractional-share trading — but the trick is to give your investments enough time to turn a little into a lot.

Long-term investing doesn’t have to be complicated, but it must be deliberate and planned. Here are four strategies that cover the four key elements of long-term success.

Diversification

If two words could summarize the primary safeguard of long-term investing, those words would be “diversified portfolio.” Spreading your eggs around minimizes your exposure to any single investment, reducing long-term volatility and mitigating the risk of going all-in on a single company, sector or asset class. 

According to Fidelity, a basic diversified portfolio has four main components.

• Domestic stocks
• International stocks
• Bonds
• Short-term investments like CDs and money market funds

Buy and Hold

For decades, heavyweight investors from Warren Buffett and Benjamin Graham to Peter Lynch and Jack Bogle have cautioned against trying to time the market and instead recommend staying invested to capitalize on compounding and capital appreciation. While tempting, trying to buy low and sell high presents two risks that will eventually foil most long-term investors.

• Market unpredictability: The incalculable number of variables that drive market volatility are so varied and erratic that even skilled and experienced investors will fail to predict the peaks and valleys with any regularity over the long term.
• Missing the up days: A handful of positive trading sessions generate a vastly disproportionate amount of market growth, and investors who jump in and out to avoid downturns can miss them — with devastating consequences. According to Hartford Funds, missing just the market’s 10 best days over the last 30 years would have cut your returns in half. Missing the 30 best days over the last 30 years would have slashed your returns by a grueling 83%. 

Dollar-Cost Averaging

The strategy long-term investors use to schedule their contributions will impact their success over the years and decades. Investment firms like Charles Schwab and Merrill Lynch recommend dollar-cost averaging to simplify the process, eliminate emotions, maintain discipline, manage volatility and ensure consistency over extended investment horizons.

Dollar-cost averaging is an automated approach in which investors contribute a fixed dollar amount on a set schedule — say, $100 every other Thursday — regardless of the market’s behavior. This ensures regular contributions and, over time, smooths the market’s ups and downs by purchasing more of a security when it’s cheap and less when it’s expensive. 

Dividend Reinvestment

Dividend reinvestment plans (DRIPs) use periodic shareholder distributions to buy more of the stocks that generate them instead of the investor cashing out dividends as income. Over time, reinvested dividends produce a compounding effect that can dramatically accelerate returns. According to Charles Schwab, a $100,000 investment in an S&P 500 fund made in 1990 would have been worth $1.1 million in 2022. With dividend reinvestment, that number would have nearly doubled to $2.1 million.

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