Seven Tips for Long-Term Investing From Australia

Before you can invest for the long term, you need to know how much money you have. That means getting your finances in order.

“Just like a doctor wouldn’t write you a prescription without diagnosing you first, an investment portfolio shouldn’t be recommended until a client has gone through a comprehensive financial planning process,” says Taylor Schulte, a US-based certified financial planner (CFP) and host of the Stay Wealthy Podcast.

Start by taking stock of your assets and debts, setting up a reasonable debt management plan and understanding how much you need to fully stock an emergency fund. Tackling these financial tasks first ensures that you’ll be able to put funds into long-term investments and not need to pull money out again for a while.

Withdrawing funds early from long-term investments undercuts your goals, may force you to sell at a loss and can have potentially expensive tax implications.

Everyone has different investing goals: early retirement, saving for a home renovation or building a deposit for a home.

No matter what the goal, the key to all long-term investing is understanding your time horizon, or how many years before you need the money. Typically, long-term investing means five years or more, but there’s no firm definition. By understanding when you need the funds you’re investing, you will have a better sense of appropriate investments to choose and how much risk you should take on.

For example, Derenda King, a CFP in California, suggests that if someone is investing with a timeline of say 18 years, they can afford to take on more risk.

“They may be able to invest more aggressively because their portfolio has more time to recover from market volatility,” she says.

Once you’ve established your investing goals and time horizon, choose an investing strategy and stick with it. It may even be helpful to break your overall time horizon into narrower segments to guide your choice of asset allocation.

Stacy Francis, president and CEO of Francis Financial, divvies long-term investing into three different buckets, based on the target date of your goal: five to 15 years away, 15 to 30 years away and more than 30 years away.

The shortest timeline should be the money you’re most conservative with, Francis suggests, a portfolio of 50% to 60% in stocks and the rest in bonds. The most aggressive could go up to 85% to 90% stocks.

“It’s great to have guidelines,” Francis says. “But realistically, you have to do what’s right for you.”

Saxo Australia’s Henry O’Neil says that discipline isn’t just a virtue, but a “secret weapon in investing”.

“Forget trying to predict the perfect moment or being caught up in major headlines,” he says. “Markets will rise, fall and surprise, but a disciplined strategy will always beat impulsive decisions or chasing trends.”

He adds that the concept of dollar cost averaging, consistently adding the same amount to your portfolio every pay cycle no matter the price, beats any attempt to time the market in the long run.

To avoid knee-jerk reactions to market dips, be sure you know the risks inherent in investing in different assets before you buy them.

Stocks are typically considered riskier investments than bonds, for instance. That’s why Francis suggests trimming your stock allocation as you approach your goal. This way you can lock in some of your gains as you reach your deadline.

But even within the category of stocks, some investments are riskier than others. For example, Australian stocks are thought to be safer than stocks from countries with still-developing economies because of the usually greater economic and political uncertainties in those regions.

Bonds can be less risky, but they’re not 100% safe. For example, corporate bonds are only as secure as the issuer’s bottom line. If the firm goes bankrupt, it may not be able to repay its debts, and bondholders would have to take the loss.

Assessing risk is not always as simple as looking at credit ratings, however. Investors must also consider their own risk tolerance, or how much risk they’re able to stomach.

“It includes being able to watch the value of one’s investments going up and down without it impacting their ability to sleep at night,” King says. Even highly rated companies and bonds can underperform at certain points in time.

Spreading your portfolio across a variety of assets allows you to hedge your bets and boost the odds you’re holding a winner at any given time over your long investing timeframe.

“We don’t want two or more investments that are highly correlated and moving in the same direction,” Schulte says. “We want our investments to move in different directions, the definition of diversification.”

Your asset allocation likely starts with a mix of stocks and bonds, but diversifying drills deeper than that. Within the stock portion of your portfolio, you may consider the following types of investments, among others:

• Large-company stocks, or large-cap stocks, are shares of companies that typically have a total market capitalisation of more than $10 billion.
• Mid-company stocks, or mid-cap stocks, are shares of companies with market caps between $2 billion and $10 billion.
• Small-company stocks, or small-cap stocks, are shares of companies with market caps below $2 billion.
• Growth stocks are shares of companies that are experiencing frothy gains in profits or revenues.
• Value stocks are shares that are priced below what analysts (or you) determine to be the true worth of a company, usually as reflected in a low price-to-earnings or price-to-book ratio.

Stocks may be classified as a combination of the above, blending size and investing style. You might, for example, have large-value stocks or small-growth stocks. The greater mix of different types of investments you have, generally speaking, the greater your odds for positive long-term returns.

Diversification via Managed Funds and ETFs

To boost your diversification, you may choose to invest in funds instead of individual stocks and bonds. Managed funds and exchange-traded funds (ETFs) allow you to easily build a well-diversified portfolio with exposure to hundreds or thousands of individual stocks and bonds.

“To have true broad exposure, you need to own a whole lot of individual stocks, and for most individuals, they don’t necessarily have the amount of money to be able to do that,” Francis says.

“So one of the most wonderful ways that you can get that diversification is through mutual (managed) funds and exchange-traded funds.”

That’s why most experts, including the likes of Warren Buffett, recommend average people invest in index funds that provide cheap, broad exposure to hundreds of companies’ stocks.

The House Always Wins

O’Neil points to a 2022 study by S&P Dow Jones Indices which found that out of 2,132 actively managed US mutual funds, or what we call managed funds in Australia, not a single fund consistently ranked in the top quartile of performance compared to their respective benchmarks over five years.

“Even when the bar was lowered, only 1% managed to stay in the top half of performers year after year,” O’Neil says.

Rather than trying to outsmart the ASX200 by picking winners, O’Neil prefers to focus on building a properly diversified portfolio.

“It’s like betting on the entire field rather than a few players. And let’s face it, the Warren Buffett’s and George Soros’ of the world are rare unicorns. For the rest of us, trying to pick winners is often just a costly and arrogant gamble.”

Investing costs can eat into your gains and feed into your losses. When you invest, you generally have two main fees to keep in mind: the expense ratio of the funds you invest in and any management fees advisors charge.

In the past, you also had to pay for trading fees each time you bought individual stocks, ETFs or mutual funds, but these are much less common now.

Fund Expense Ratios

When it comes to investing in managed funds and ETFs, you have to pay an annual expense ratio or management fee, which is what it costs to run a fund each year. These are usually expressed as a percentage of the total assets you hold with a fund.

Schulte suggests seeking investments with expense ratios below 0.25% a year. Some funds might also add sales charges (also called front-end or back-end loads, depending on whether they’re charged when you buy or sell), surrender charges (if you sell before a specified timeframe) or both. If you’re looking to invest with low-cost index funds, you can generally avoid these kinds of fees.

Financial Advisory Fees

If you receive advice on your financial and investment decisions, you may incur more charges. Financial advisors, who can offer in-depth guidance on a range of money matters, often charge an annual management fee, expressed as a percentage of the value of the assets you hold with them. This is typically 1% to 2% a year.

Robo-advisors are a more affordable option at 0% to 0.25% of the assets they hold for you, but they tend to offer a more limited number of services and investment options.

Long-Term Impact of Fees

Though any of these investing costs might seem small independently, they compound immensely over time.

“Would you pay 2% a year for an active fund manager who is statistically likely to underperform the benchmark? Or would you prefer an exchange-traded index fund charging just 0.05% a year?,” O’Neil says.

“The maths doesn’t lie, investment returns compound for you, but management fees compound against you. In 2024, financing an active fund manager is no longer ‘peace of mind’ or financial stability, rather an expensive and unsatisfactory alternative to an index fund.”

Consider if you invested $100,000 over 20 years. Assuming a 4% annual return, paying 1% in annual fees leaves you with almost $30,000 less than if you’d kept your costs down to 0.25% in annual fees.

If you’d been able to leave that sum invested, with the same 4% annual return, you would have earned an extra $12,000, meaning you would have over $40,000 more with the lower cost investments.

Even though you’ve committed to sticking with your investing strategy, you still need to check in periodically and make adjustments.

Francis and her team of analysts do an in-depth review of their clients’ portfolios and their underlying assets on a quarterly basis. You can do the same with your portfolio. While you may not need to check in quarterly if you’re passively investing in index funds, most advisors recommend at least an annual check in.

When you check up on your portfolio, you want to make sure your allocations are still on target. In hot markets, stocks might quickly outgrow their intended portion of your portfolio, for example, and need to be pared back. If you don’t update your holdings, you might end up taking on more (or less) risk with your money than you intend, which carries risks of its own. That’s why regular rebalancing is an important part of sticking with your strategy.

You might also double-check your holdings to ensure they’re still performing as expected.

Look for changes in your own situation, too.

“A financial plan is a living breathing document,” Schulte says. “Things can change quickly in a client’s life, so it’s important to have those review meetings periodically to be sure a change in their situation doesn’t prompt a change with how their money is being invested.”

Overall, investing is all about focusing on your financial goals and ignoring the busybody nature of the markets and the desire to tinker when times are bad. That means buying and holding for the long haul, regardless of any news that might move you to try and time the market.

“If you are thinking short term, the next 12 months or 24 months, I don’t think that’s investing. That would be trading,” says Vid Ponnapalli, a CFP and owner of US-based Unique Financial Advisors and Tax Consultants.

“There is only one way of investing, and that is long term.”