10 Keys to Successful Long-Term Investing – You Need to Know

The following will help give you context and meaning as to what it takes to be a successful long-term investor, why these principles are important, and how to internalize them to make them your own personal investing philosophy.

Achieving financial freedom is not complicated, but you need to understand and do the following:

1. Start Early!

The sooner the better. You need as much time as possible to let your investment capital compound. If you absolutely cannot save the full annual $5,500 IRA contribution amount save as much as you can, and work towards increasing your annual contribution amount each year.

2. Make Saving Money Automatic

The best way to save money is to make it automatic. If you don’t have it you can’t spend it. The US Government figured this out years ago when then starting collecting income tax. That’s why they withhold your taxes out of every paycheck. They knew that it was much more likely (and less painful) for people to pay their taxes if they collected it before you had a chance to spend it.

You should do likewise. Make saving easy, consistent and reliable by setting up an automatic deposit program with your employer or your bank. Have your retirement money automatically deposited into your IRA account with every paycheck. For example, if you get paid every two weeks (26 times a year) then just divide your annual IRA contribution amount (we’ll use the current $5,500 maximum amount) by 26 which comes to $211.53 from each pay period.

Don’t wait until the end of the year (or April 15) to make your IRA contribution it’s harder to some up with the larger amount of money. Also contributing to your IRA throughout the year allows you to take advantages of market dips (cash available to invest when stocks are on sale), and puts your money to work sooner so that you are earning dividend income throughout the year.

3. Minimize Taxes

This investment killer is easy to conquer just open a tax sheltered Roth IRA. This is a self-directed retirement account where you pay no taxes while your investment grows or when you withdraw it! This is the best gig in town – if you don’t have one yet you are missing out on the investing opportunity of your life! If you don’t qualify for a Roth IRA then a Traditional IRA is the next best tax advantage account to use. If you can swing contributing to both all the better. In most cases you can have one of each. See your tax professional.

4. Outpace Inflation

Inflation and the loss of future purchasing power that it creates is a big and scary long-term risk. The average annual inflation rate over the past 100 years has been 3.24% that may not seem like much for one year but adds up. In fact, at this rate your purchasing power will be cut in half in 23 years. If you keep your money in cash you’ll never retire financially secure. Other “safe” investments such as Treasury Bills, Money Market accounts, and CD’s never out grow inflation fast enough to allow you to retire financially independent. Keeping your saving in cash may make you feel safe in the short term but it is a disaster for your future.

5. Keep Commissions, Fees, and Expenses Low

The challenge is to find investments that will earn a high enough rate of return that will outpace taxes, inflation and expenses without going outside your comfort zone in terms of risk tolerance.  Unlike mutual funds which have reoccurring fees every year purchasing individual stock through a discount broker is a low one time commission (around $5 to $10) that is very inexpensive and will help put you in a position to earn a high return. This assumes you are a long-term investor (15 to 30 years) and not trying to time the market by trading in and out for quick capital gains.

6. Invest for Income not Capital Gains

This is a major paradigm shift from the market timing buy low sell high “conventional ideology” of today. I can’t express how important it is for a long-term retirement investor to focus on income and not capital gains. The whole dividend geek system is based and designed around investing for income. Here’s why it’s so critical:

  • Allows you to safely and inexpensively take advantage of the principle of compound interest (reinvesting dividends)
  • Protects you from your worst enemy “yourself” by helping to prevent the human emotions of fear and greed so you will hold on to your investments and not buy overvalued stock when the market it high (greed) or sell for a loss when the market it down (fear).
  • Countless studies have shown that investing for capital gains is a self-defeating time consuming effort that woefully under performs the market. In fact, over time the average traders return is 2.8% which is below the inflation rate.

We invest for income not capital gains so we never worry or are concerned with the price of the stock; instead, we monitor the annual increase in dividend payments and replace a stock if it fails to increase its dividends for two consecutive years. Similar to the value of income property or a business as the income it provides rises the value of the asset rises. Likewise, the value of a public company (stock price) will naturally rise over time as its income increases in the form of rising dividend payments. Remember income, income, INCOME,  not capital gains! Focus on the quality of income stream and dividend growth and NOT the price of the stock or stock market! I’m not holding anything back here – this is easier said then done, but it is critical and essential! If you can do this you will be not be swayed by your emotions (greed and fear) to time the market, which leads to low performance at best and large losses at worst, or keeping cash out of the market where it is not working for you by generating income that can be compounding into more income.

7. Buy on Sale

When you buy stock at at a discount to fair value you build in what Benjamin Graham the Father of value investing called a ‘Margin of Safety.’ This safety margin helps investors in the following ways:

  • Prevents you from over paying
  • Improves capital appreciation and higher initial dividend yield
  • The buffer helps you hold on to your stock during market corrections and downturns in the economic cycle

8. Invest for Long Term

Money invested in a Roth IRA is strictly for retirement and should be dedicated to a long-term holding period at minimum 15 years, but more typically 20 to 30 years.

9. Invest in Companies that raise their dividend every year

This is the core principle of dividend growth investing that Dividend Geek uses. Buying stock of companies that raise their dividend each year not only identifies the best companies with strong competitive advantages, but also produces an additional compounding effect that allows us to generate higher returns and stay ahead of inflation when we start using our dividend income in retirement.

10. Reinvest Dividends

Naturally at Dividend Geek we love dividends! Before retirement during our accumulation period we reinvest all dividends. The compounding allows you to grow the number of shares you hold which in turn increases your dividend income. The compounding effect starts slow, but over time increases exponentially as golden eggs produce more geese that lay golden eggs, which in turn produces even more golden eggs… and so on.

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