How does investing work best? When you have an understanding of these key investment principles and strategies

How does investing work best for long-term gains? Smart investors balance aggressive and conservative investments in their portfolio with their investment objectives, and the market outlook. Above all, they avoid the urge to become more aggressive as prices rise and more conservative as prices fall.

There’s also a lot of hidden value in the stock market—that is to say, value that is not yet evident in the economic or business statistics.

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How does investing work best?: Think like a portfolio manager

Portfolio managers gather information from companies, industry studies and other sources. Good portfolio managers then try to build their client portfolios so that they make money if things go well, but won’t lose too much if their assessments sometimes turn out to be faulty.

We do our own research for our newsletters and investment services, and we apply it from a portfolio manager’s perspective. That’s why we advise sticking to well-established companies; they tend to hold on to more value when things go wrong and recover soon.

Bad times usually hit some market segments much more severely than others. That’s why we advise spreading your money out across most if not all of the five main economic sectors.

How does investing work best for long-term results? Here are strategies every investor should know about

Dollar cost averaging is a good strategy for investing long term: Dollar cost averaging is when you buy stocks gradually during the course of your working years. By using this strategy, market declines will have less effect on your long-term profits.

A dollar-cost averaging strategy involves investing equal amounts of money over a specific period.

It’s a little like systematic saving, except that you put your money into stocks (or ETFs) instead of a bank account.

If you invest a fixed sum at regular intervals throughout your working years, perhaps increasing that sum from time to time as your income rises, you can largely forget about market trends. That’s because you’ll automatically buy more shares when prices are low and fewer when they are high, and you will benefit from the long-term rising trend in the market.

All in all, if you implement dollar cost averaging, you’ll lower your long-term market risk considerably.

Our conservative investing strategy works for long-term returns: Conservative investing is an investment strategy that involves a focus on lower-risk, predictable and stable businesses. This strategy typically involves the purchase of top blue chip stocks and other low-risk investments. Our conservative investment strategy will help you avoid danger while keeping your boredom from holding stocks for the long-term to a minimum.

In our view, your goal as an investor, particularly if you follow a conservative investing strategy like our Successful Investor approach, is to make an attractive return on your investments over a period of years or decades. Failure means making bad investments that leave you with meagre profits or even losses.

For conservative investing, focus on investing in high-quality stocks that offer hidden value, and follow the guidelines of our Successful Investor philosophy:

• Invest mainly in well-established, dividend-paying companies. Ideally, some of your picks should also have hidden assets. That is, assets that many investors disregard or fail to appreciate.
• Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance, and Utilities.
• Downplay or avoid stocks in the broker/media limelight, where a modest business setback can set off a deep, sudden and sometimes permanent drop in the stock.

How does investing work best? For long-term growth, look for dividends from your investments

One tip we share often is to invest in companies that have been paying a dividend for, ideally, five or more years. Dividends are typically cash payouts that serve as a way for companies to share the wealth they’ve accumulated. These payouts are drawn from earnings and cash flow and paid to the shareholders of the company. Typically these dividends are paid quarterly, although they may be paid annually or even monthly as well. Canadian citizens who own shares in Canadian stocks that pay dividends will also benefit from a special tax break that they may be eligible to receive.

The personal finance advice above should give you a strong starting point for investing. It’s important to understand that wealth isn’t made by making rash investment decisions. Wealth is built over decades.

Bonus tip: Compounding will help your personal wealth grow over the long-term: Compound interest is earning interest on interest. Over time, interest-paying investments will earn more and more money from the effects of compound interest.

Compounding applies to equity investments like stocks, as well as to fixed-return, interest-paying investments like bonds. When you earn a return on past investment returns (including reinvested dividends), the value of your investment can multiply. Instead of rising at a steady rate, the number of dollars in your portfolio will grow at an accelerating rate.

Compounding is what makes investing a worthwhile pursuit. At the same time, though, it’s very important to keep an eye on investments or expense fees that affect the amount of interest you earn. Even 1% a year can be a huge drain on your portfolio.

What strategies do you follow for long-term investment growth?