Strategies of Long Term Investments

The strategies of long term investments will usually be completely different than strategies that are intended for short term investments. Strategies for long term investments can include buy and hold, dollar cost averaging, laddering, using Dividend Reinvestment plans known as DRIPs, and reinvested fund distributions, among other strategies. Each investor is different, and may use a different combination of investment methods and strategies based on their specific trading style and risk management guidelines.

Buy and Hold

Buy and hold is one strategy for long term investments, and this strategy is commonly used by a large percentage of traders and investors. Buy and hold consists of buying solid investments, normally investments in companies that are well established and proven to be profitable over the long run, and then holding on to the investments regardless of what the market s doing. The exception to this rule is if there is a development that would reduce the value of the underlying company, such as bankruptcy or extensive liability payments, in which case most investors will sell. With the buy and hold strategy, the expectation is that over time the market value of the investment will go up. This strategy for long term investments can have some extra bonuses, because stock can split over time, doubling the shares held in a portfolio.

Dollar Cost Averaging

Dollar cost averaging is another strategy commonly used for long term investments. This method is also referred to as the constant dollar plan. With this method, an investor will invest a specific amount consistently, such as One hundred dollars a month. The amount and frequency of the investment will vary depending on the specific investor, but the same amount is invested for each time period in the same security. The average price paid for the investment may get lower, because when the market value of the stock decreases the continuous investment plan will be able to purchase more shares. Dollar cost averaging does not mean a guarantee that a profit will occur over the long term, and there is no automatic loss protection, but this strategy for long term investments will help an investor build up an asset base while minimizing the risks involved.

Laddering

Laddering is a strategy used for long term investments by many market traders, and this method is usually used with bonds and Certificates of Deposit, also known as CDs. Laddering involves staggering the maturity dates of the investments, so that not all of these investments mature at the same time but rather on a staggered schedule. The investment can be divided into three, four, five, or even more individual investments that all mature at different times. Investments with similar ratings are used, the only difference is the maturity date of the investments. Many investor ladder maturity dates by one to two years, but the time period can be shorter or longer. Laddering offers two distinct advantages, minimizing the reduced earnings risk that can happen if the interest rate lowers and all the investments mature at the same time, and flexibility. If an investment matures, it can be re-invested in the same way or it can be liquidated so that other investments with more potential can be purchased.

DRIPs

Another strategy for long term investments involve dividend reinvestment plans, called DRIPs for short. This is one of the easiest strategies to use for traders who want to build up a portfolio slowly over an extended time. A DRIP allows earnings from the investment to be reinvested, and these plans use compounding interest to maximize the profit potential. The dividend earnings are reinvested and added to the plan principal, and this is the new base for future earnings. Compounding is one of the best ways to allow the investment to gain value faster, and this strategy for long term investments is frequently used. DRIPs are offered by more than one thousand corporations in the United States alone, and offer great investment potential for the long term.

The information supplied in this article is not to be considered as medical advice and is for educational purposes only.