7 Investment Strategies for Long-Term Growth

Consistent contributions, index funds, low-cost investments, dollar-cost averaging, dividends reinvestment, regular reviews, and portfolio diversification can yield 7% annual returns.

Diversifying Your Portfolio

Asset Allocation
“If you’re looking to get into the stock market, or buy bonds, or start investing in real estate — that’s known as ‘asset allocation,’ which is breaking your available money down into different types of asset classes,”For example, a well-balanced portfolio might consist of 60% stocks, 30% bonds, and 10% real estate. This is very fine as a first pass, but you can adjust this to better suit your level of risk tolerance, investment objectives, and time horizon. Younger, and perhaps more aggressive investors may have a higher percentage of equities in their portfolio given the growth opportunity that stocks present. Conversely, many retirees focus on income and own more fixed-income investments (bonds).

Sector Diversification
Furthermore, investing into multiple sectors (tech, healthcare, consumer goods, etc.) decreases your risk even more. Every sector has its own unique position when it comes to the state of the economy. For example, during a slowdown, consumer staples may outperform in comparison to the discretionary sector. Ensuring that there’s a mix of sectors means your portfolio won’t be harmed too much by the volatility of one industry.

Geographic Diversification
Investing in domestic and international markets is known as geographic diversification. Global markets often don’t move together. If one falls, another might go up instead. For instance, even if the U.S. stock market faces a decline that year, emerging markets in Asia might grow rapidly instead. This allows you to avail yourself of some global economic trends and protect against country-specific risks.

Investment Vehicles
Beyond that, you also have the diversification imparted from using different investment vehicles (mutual funds, ETFs, individual stocks). Although mutual funds and ETFs provide diversification because they’re a basket of securities, individual stocks may give you exposure to more targeted opportunities in specific companies. These vehicles by themselves are quite powerful, but when you combine all three with the same stocks, your portfolio becomes more resilient!

Regular Rebalancing
Rebalancing on a regular basis is key to ensuring that you’re keeping your asset allocation where you want it to be. Individual investments can appreciate at different rates, so there’s a good chance that your proportions are out of whack.

Putting it in practice: If you have stocks and they go up vs. your bonds, for example, and now 70% of your portfolio is allocated to them when initially it was only 60%, then you sell some stocks and buy more bonds to get back to that allocation. Rebalancing at regular intervals ensures consistency with your investment style.

Quantitative Example
For example, let’s say you’re an individual investor with a $100,000 portfolio allocated as follows:

$60,000 in stocks
$30,000 in bonds
$10,000 in real estate

Assume 10% stocks, 5% bonds, and 7% real estate growth results in the new values:

Stocks: $66,000
Bonds: $31,500
Real estate: $10,700

The new total is $108,200. To rebalance, the investor could sell $1,200 worth of stocks and use that money to buy bonds, achieving the original 60/30/10 allocation.

Investing in Index Funds

Index funds present a compelling option for long-term return on investment. This is because they are cost-effective, have diversification benefits, and provide consistent performances. Index funds aim to replicate the performance of a particular index like the S&P 500 and provide investors with an easy, cost-effective way to gain exposure to a broad section of the market. That’s where you will find the opportunity to leverage index funds to build wealth:

Understanding Index Funds
“Index funds” refers to mutual funds in which the securities it holds, such as stocks or bonds, mirror those on a market index and carry parallel proportions with that of the market!

Index fund: a type of mutual fund that holds all stocks in a stock market index. For instance, an S&P 500 index fund has ownership of all companies listed on the S&P 500. The lower charges, compared to actively-managed funds, stem from this passive style of management. Index funds tend to charge much lower expenses—around 0.2% versus 1.0% for active funds, on average—which can make a huge difference in what investors end up with over time.

Benefits of Index Funds
Whether you are a direct or indirect investor, the investment in index funds can be diversified at any time. When you invest in an S&P 500 index fund, you’re investing in a total of 500 large U.S. companies from all types of industries. This diversification helps spread the risk so that no single stock can strike a devastating blow.

Cost Effective: Lower expense ratios mean more money remains invested, which compounds over time. For example, if you invest $10,000 in an index fund with a 0.2% expense ratio, that’s just $20 in fees annually compared to $100 in an actively managed fund charging a 1.0% expense ratio for the year.
Performance: Over time, index funds have outperformed the vast majority of actively managed funds. Over the 20 years to 2021, more than nine out of ten active U.S. large-cap funds delivered weaker returns than the S&P 500 index.

Choosing the Right Index Fund

Expense Ratio: Always go for funds with very low expense ratios. This assumption will lead to maximum returns on your investment at the time of maturity. Vanguard’s S&P 500 ETF (VOO) and Fidelity’s ZERO Total Market Index Fund (FZROX) are two popular options that levy minimal fees.
Tracking Error: A measurement of how closely (or not) the fund replicates the index. Lower tracking errors reflect better performance in line with the index.
Fund Size: A fund’s liquidity and bid-ask spread tend to go down in size. So, funds tend to trade tighter, which is generally a positive for end investors as it becomes cheaper and easier for them to purchase and sell their shares.

Example of a Good Index Fund Investment
What if you took $10,000 and invested that into an S&P 500 index fund which returned an average of 7% per year (compounded) over the course of 30 years? With no extra contributions, your $10,000 investment could grow to ~$76,123.00. With regular investments, the pace accelerates. Your investment would balloon to approximately $369,231 over that same time frame if you were to add another $200 per month.

Implementing an Index Fund Strategy

Defined Goals: Define what you are investing for. Is it retirement, education planning, saving to purchase a home or car in the future, etc.? Clear goals help establish your investment horizon and risk tolerance.
Automate: By setting up automatic contributions to funds, you will be taking the emotion out of your investing and contributing money through thick and thin. With dollar-cost averaging, the price is averaged out over a longer period, so market volatility has less impact on the ultimate purchase.
Regularly Review: Even though index funds are more passive investments, they still may need periodic tweaking as your financial life changes.

Where appropriate, stick to the plan. Emerging from market volatility with a new sense of panic could lead to hasty decisions for many investors. In general, adhering to the conservative and proven long-term strategy is more effective. During and following the 2008 financial crisis, those who didn’t immediately pull their money invested in index funds experienced strong recovery year-over-year.

Utilizing Dollar-Cost Averaging

Dollar-cost averaging, also known as the “constant dollar plan,” is an investing strategy where you invest a constant amount of money at regular intervals irrespective of market conditions. This will help to lower the impact of market volatility and build wealth over time.

Practical Use of Dollar-Cost Averaging
Dollar-cost averaging is investing a regular, equal amount in the same asset over fixed time steps. For instance, if you were planning to invest $500 a month in mutual funds, this means when the price of shares is low, you can buy more, and when it’s high, you buy fewer. By doing this, you’re averaging the price of your purchase over time, so you are not making a huge investment at one specific point in time.

The Advantages of Dollar-Cost Averaging

Emotion-Free Investing: Because your investments will be made automatically, you won’t need to use emotion to decide when and how much of your excess earnings should be used in buying securities. By doing this, you can steer clear of the long-term perils associated with market timing—such as attempting to purchase when markets are at their all-time highest or offer falling manna from heaven.
Reduce Market Volatility: Dollar-cost averaging can protect your investments against short-term market fluctuations. The average cost per share will decrease over time and be less than the average market price per share.
Promotes Disciplined Regular Investing: By systematically saving small amounts of money, you’ll be more likely to continue adding to your investment over time. This is the important part for long-term generative growth.

Dollar-Cost Averaging Example

Let’s take an example of an investor who wants to buy stock worth $12,000 over the course of a year. These are the monthly prices at which he buys the stocks:

January: $50
February: $45
March: $55
April: $40
May: $50
June: $60

Investing $1,000 per month gets the investor:

January: 20 shares
February: 22.22 shares
March: 18.18 shares
April: 25 shares
May: 20 shares
June: 16.67 shares

At the end of six months, having faithfully followed his dollar-cost averaging program and purchasing shares with an average cost per share of $49.18, he ends up buying 122.07 shares at prices that varied from as low as $40 to as high as $60. This mitigates the risk of buying all shares at a high price.

Additional Considerations

Pros: Averaging into gains and losses can help reduce the volatility in your portfolio. You may feel less pressure to time the market during volatile times, which is a good thing.
Investment Amount: Determine how much you can invest regularly without stretching your budget too much.
Frequency of Investment: An investor can invest monthly, weekly, bi-weekly, or whenever they want. The key is consistency. Be CONSISTENT!
Selecting Investment Vehicles: You can do dollar-cost averaging with mutual funds, ETFs, or individual stocks. Select investments based on your time horizon and risk comfort level.
Automate Your Investing: Establish automatic recurring transfers from your bank account into investment accounts. Many brokerages have automated investment plans to help you stay the course.
Monitor and Adjust: Though DCA is set-it-and-forget-it easy compared to TCA, you should still monitor your investments regularly. Adjust your contributions according to changes in your financial condition or investment goals.

Quantitative Insight
According to historical data, dollar-cost averaging can even outperform lump-sum investing over time, particularly in a highly volatile market. Vanguard’s research suggests that in nearly two-thirds of the rolling 10-year periods studied, a systematic investment plan called dollar-cost averaging should leave you with more money after investing additional funds at six-month intervals. This well illustrates the benefits of using DCA to reduce risk and improve expected returns.

Reinvesting Dividends

What Is Dividend Reinvestment?
Dividend is the regular sum payable as often as possible out of the benefits while they remain to shareholders. You need not accept these dividends as cash payments. However, you can reinvest this money into purchasing additional shares of the same company or fund from where it has been derived. When you reinvest your dividends, this growth is accelerated because you’re racking up dividends on a larger number of shares.

Benefits of Reinvesting Dividends

Compounding Growth: Reinvest dividends to take advantage of compounding growth. For example, if you own 100 shares of XYZ stock and it pays a $2 dividend per share annually, then you receive an annual total of $200 in dividends. However, if you reinvested this $200 to buy more shares instead of taking cash, your future dividends become bigger. This continues growing like a snowball.
Potential for Greater Share Accumulation: By constantly reinvesting dividends, you can ultimately end up owning more shares without investing a single penny out of pocket. When the market is down, you get more shares of a company for any dividend, which helps increase share count and ultimately growth long-term.
Cost-Free: Most brokerage firms and companies that provide dividend reinvestment plans (DRIPs) will do so without charging a transaction fee. In other words, you can reinvest your dividends again and again without paying any extra fees, making the smartest use of your investment.

Dividend Reinvestment Example
For example, if you have an investor who owns 1,000 shares of a stock that costs $50 per share with a dividend yield of 4% yearly:

Annual dividend income: $2,000
With the investor reinvesting this dividend and purchasing 40 more shares each year, the portfolio’s growth accelerates.

The investor who owned 1,000 shares would have them increased at about a compounded annual rate of 5% and end up with roughly 1,485 shares after 10 years. The cumulative value of the portfolio increases more not only because of capital gains but also from an increasing number of shares due to dividend reinvestment.

How to Reinvest Dividends

Know the Best Stocks: Look for companies that pay stable or increasing dividends. Some excellent choices include Dividend Aristocrats (companies that have improved their dividend for at least 25 years in a row).
Set Up a DRIP: Sign up for the Dividend Reinvestment Plan through your brokerage or the company itself. DRIPs will take care of your dividend reinvesting for you.
Checking Your Dividend Growth: Keep a check on your dividend stocks to ensure they are consistent with their dividend policies. Companies like NVS may issue new dividends while continuing with their dividend, and it’s important to be aware of this.
Having Multiple Dividend Sources: Diversify your dividend income sources across multiple sectors. This provides protection, ensuring that your dividend checks continue even if one sector reduces its payouts.

Quantitative Insight
Here is the historical data for how dividend reinvestment can demonstrate its magic. Over the long term, reinvested dividends have provided 40% of S&P’s total return. According to Standard & Poor’s, over the period from 1926 to 2020, an estimated 40% of the S&P 500’s total return can be attributed to dividends and their reinvestment.

Focusing on Low-Cost Investments

It would be better to focus on low-cost investments in order to get the most bang for your buck over time. Get rid of high fees that can eat up all your profits so you can really focus on low cost. Now, this begs the question as to how one can use low-cost investments effectively.

Know Your Investment Costs
Investment costs can take many shapes, but some of the most common include expense ratios, transaction fees or commissions, and management or wrap fees. The expense ratio is a fee that mutual funds, ETFs, and index funds charge to cover their annual costs, and it is taken out of your investment each year as a percentage. Reducing these fees will significantly increase the performance of your portfolio.

Low-Cost Investment Advantages

Higher Net Returns: Every dollar saved in fees is another one that can stay invested and grow over time. Fees do matter: just 1% more in fees can cost you tens of thousands over decades of investing.
Increased Compounding: The lower the costs, the more of your investment gains you get to keep and reinvest. This boosts their long-term ability to compound. Over time, that can make a significant difference in the value of a portfolio.
Predictable Expenses: Cheap investments typically have straightforward, predictable fees or expenses, providing a strong basis for regular financial planning and budgeting purposes.

Opting for Low-Cost Investment Sources

Index Funds/ETFs: On average, the costs of index funds and ETFs are low. For example, Vanguard’s Total Stock Market Index Fund (VTSAX) has an expense fee of 0.04%, compared to the average actively managed equity fund’s approximately 1.0% expense fees.
No-Load Mutual Funds: When you purchase shares and redeem your money, you aren’t charged a sales commission on those transactions. This includes no front-end or back-end load fees, making them inexpensive options for long-term investors.
Discount Brokerages: Use discount brokerages that charge low or zero trading fees. These allow you to invest more of your money. Firms like Fidelity, Schwab, and Robinhood offer low-cost platforms.

Example of Cost Impact
If you have $10,000 invested in two different funds, where one has a 0.1% expense ratio and the other has 1.0%:

If both funds grow at an average 7% rate each year before fees, after 30 years the lower-cost fund will have grown to about $74,000 and the higher-cost one only to around $57,000. This $17,000 difference demonstrates the major impact of lower costs on long-term growth.

Low-Cost Investment Strategy

Research and Compare Fees: Prior to the execution of an investment, conduct research and compare expense ratios, management fees, and all other costs and charges. Opting for funds with lower fees can drastically increase your returns in the long run.
Tax-Advantaged Accounts: Invest through tax-advantaged accounts such as IRAs and 401(k)s. They can help reduce your tax liabilities, making it easier to achieve higher returns from investments.
Keep Checking Your Investments: Regularly review your investments to ensure they are offering returns worth the money invested. If your fund increases fees or better low-cost options become available, consider rebalancing.
Automate Contributions: Automatically invest in low-cost funds consistently to avoid market timing. Most brokerages provide automatic investment plans at no cost.

Quantitative Insight
The average investor who selected low-cost funds had an annualized expense ratio that was 0.5% to 1.0% lower than their high-fee counterparts, Morningstar found. Over a 30-year investment period, those savings could amount to tens of thousands of dollars in additional portfolio value. The bottom line is that focusing on low-fee investments can lead to significant savings.

Staying Consistent with Contributions

Why Consistent Input is Even More Important
Whether you are choosing to invest a lump sum or investing regularly, actively contributing to your investment accounts means that your portfolio will be growing on an ongoing basis. Do not get distracted by market volatility; stay consistent and let your dollar cost averaging create wonders. This disciplined approach also creates a savings habit critical for long-term financial success.

Compound Growth
Regular investments mean your money grows exponentially. The sooner and more often you invest, the better off your compounding effects will be for you. For example, if you were to put away $500 a month into an account that gets 7% interest annually, it can potentially grow to over $600k in 30 years.

Reduced Market Timing Risk
Trying to time the market is a quick way to sabotage your results, which can be easily prevented by investing on a repetitive basis. If you regularly contribute, you will buy more shares when the price is low and fewer when it’s high. This way, your overall cost evens out over time.

Building Financial Discipline
Making a habit of contributing at regular intervals also helps in building financial discipline. It forces you to save and invest more often, becoming a guiding principle for your routine money management, thus governing your overall long-term financial health.

Instance of Consistent Contributions
Assume an investor begins making monthly investments of $200 from age 25 onwards, while enjoying a yearly average compounded return of 7%. This would amount to $96,000 by the age of 65. Yet, thanks to the magic of compounding, their investment would swell close to half a million dollars. This wonderful success really shows the power of starting early and being consistent.

Employing Consistent Contributions

Set an Automatic Transfer: Automate the process by establishing regular, automatic transfers from your checking account into your investment accounts. This ensures you’re always making a contribution, busy or not, in good markets or bad. If you’ve used a brokerage that offers automated investment plans, this consistency should be easy to maintain.
Matching Pay Schedule to Investment Contributions: If you get paid bi-weekly, then contribute your funds bi-weekly. This keeps your cash flow and deliverability on point.
Grow Your Contributions Over Time: Adjust contributions as your income increases. Gradually increase the amount you contribute. Reviewing and adjusting your contributions regularly is a good way to monitor progress towards your objectives. Increase the amount you’re contributing with each raise, or once a year by some percent.
Make Use of Employer-Sponsored Plans: Take advantage of an employer-sponsored retirement plan like a 401(k). Contribute at least enough to capture the full company match because it’s essentially free money that grows with your savings, compounding over time.
Clear Goal Setting: Identify what you are aiming for in your finances and establish a roadmap to get there. Having a specific goal — whether that’s retirement, buying a home, or investing in your children’s education — can help you keep up with regular contributions.

Quantitative Insight
“We know, from long experience with our super guarantee… that the way you build up your savings is through regular contributions.” Fidelity found that market participants who stayed invested through the 2008 bear market and ensuing recovery while making regular contributions were able to grow their account balances by over 50% from 2010 to 2020. Those who remained invested through the market’s lows enjoyed a substantial recovery, underscoring that consistent investing makes a difference. This data illustrates the type of long-term gains that can result from holding on through market volatility.

Reviewing and Adjusting Regularly

Importance of Regular Reviews and Adjustments
It is very important to closely review and adjust your investment portfolio regularly to ensure it continues to match your financial needs and the current phase of the markets. This helps ensure your investments stay on target and retain the ability to help you achieve long-term goals. Whether you should follow this depends on the individual circumstances of your portfolio, but here’s how you can review and take action if necessary.

Regular Reviews Are More Important Than Ever
Periodically review your portfolio to understand how well or poorly your assets are performing and if any changes must be made. This involves checking if your investment holdings remain in proportion to one another and include all present and potential avenues of income. Regular reviews help you discover and rectify any problems before they expand into larger challenges.

How to Review a Portfolio of Funds

Revisit Periodically: Keep a predetermined review date on a regular basis, such as yearly or once every six months. Following your schedule also helps prevent you from worrying about every little fluctuation in the market, as natural drawdowns should already be built into the numbers.
Evaluate Asset Allocation: See how you are currently allocated and compare it to your target allocation. Market movements can cause your asset allocation to drift, leading to more or less risk or potentially lower returns. Rebalance your portfolio as needed to align with your desired allocation. For example, if you aim to maintain a 60% stocks/40% bonds target but stock holdings now represent more than 70%, it’s time to sell some of your winners and redeploy the cash into something cheaper.
Evaluate Each Investment Individually: Assess how well (or poorly) each investment in the portfolio has performed. Determine if they meet your expectations and help achieve your targets. Look for signs of underperformance or shifts in fundamentals that suggest selling or replacing an investment.
Consider Tax Consequences: Making adjustments can cause capital gains taxes to become due. Plan strategically to reduce or mitigate tax liabilities as much as possible. Use tax-advantaged accounts and consider strategies like tax-loss harvesting to combine gains with losses.

Example of a Portfolio Review
Imagine you have a $100,000 portfolio with the following target allocation:

60% in stocks
30% in bonds
10% in real estate

After one year, market dynamics might change your portfolio to:

70% in stocks ($70,000)
20% in bonds ($20,000)
10% in real estate ($10,000)

To rebalance, sell $10,000 of your stocks and add it to the bond side to return to a 60/30/10 allocation. This helps ensure that the level of risk you are taking remains appropriate for your investment goals.

Adapting to Life Changes
Life events like marriage, starting a family, or approaching retirement may change your goals and ability to cope with risk. Review your goals and alter the composition of your investment accounts to best match these shifting objectives.

Stay Informed: Keep tabs on the general market direction and economic indicators that can affect your stock investing results. This helps you make informed decisions during your review.
Consult with a Financial Advisor: Periodically consulting with a financial advisor gives you insights and ensures that the portfolio stays on track. An advisor can provide objective guidance for tough financial decisions.

Quantitative Insight
Vanguard has found that rebalancing once a year can increase your returns and decrease the amount of risk you take. For instance, a 60/40 portfolio has consistently performed better with regular rebalancing than without, with less volatility. “These results suggest that the first-order condition predictors are useful elements when choosing a fully flexible exchange policy,” they write.

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