One of my favorite shows is Downton Abbey. My husband (who has a knack for keeping our DVR stocked with BBC period dramas) and I watch faithfully. And whenever something financial crops up — from Thomas' ill-advised get rick quick scheme to general income inequities — I get a little more excited.
And boy, the Series Three premiere dropped a great big money problem on the Crawley family. Lord Grantham has made a huge investing mistake. He put a great deal of money in one stock, a Canadian railroad company, and that company tanked. Goodbye to the principal, to say nothing of the potential gains that have evaporated.
Watching that episode of Downton reminded me that, when it comes to long-term investing, it's important not to forget the basics — no matter what someone “in the know” tells you about the next hot thing.
Basics of Long-Term Investing
As you consider where to invest your money, it's important to think about making a plan, and then sticking with it. Here are some of the basics to remember when it comes to long-term investing:
- Diversity: The main thing was that Lord Grantham put way too many of his eggs in one basket. When you invest, you want to make sure that you have adequate diversity. This includes investing in different asset classes, as well as making sure that there is some diversity across sectors, industries, and geographies. Diversity is one way to hedge risk to your investment portfolio.
- Value: Look for value investments. Long-term value often means that you need to pay attention to the fundamentals. It's not about what's hot, and what's going up in price right now. It's what offers a good value for your investing dollar. Look to something that has solid underlying fundamentals, and you'll be more likely to choose an investment with staying power.
- Don't panic: Long-term investing requires big-picture thinking. If you want to be successful, you can't panic and unload everything at the first sign of trouble. Volatility tends to smooth out a bit over the long-term. If you have decent diversity, and if you have invested in value, your portfolio will likely make it out of the latest crisis mostly intact for the long-term.
- Consistency: You probably don't have a huge chunk of capital to invest, like Lord Grantham does, but you can still build your assets over time. This requires a certain amount of planning, and it requires you to stick to your plan. Dollar-cost averaging can be a way for you to consistently invest over time. You can consider investments like DRIPs, index funds, and ETFs that make it easy to buy partial shares and get started with a small amount of money. Invest consistently, and you'll increase your chances of doing well over the long haul.
The basics of successful long-term investing are generally rather boring. However, in many cases, a good plan and an adherence to the basics can help you build your wealth over time. Consider your plan, and resolve to stick to the basics, and you might be surprised at how positive the result can be.