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6 steps to building a long-term investment strategy

Key takeaways

  • A good plan starts with a firm understanding of your goals and needs.
  • A well-diversified portfolio may help you weather volatile markets and avoid reactionary or emotional decision-making that could potentially hurt your ability to succeed.
  • Discussing your plan with your partner, your family, and a trusted financial professional may help you strengthen and further refine your plan.

Investing can be complicated at times, especially if you are managing your portfolio on your own. But the keys to building a solid, long-term investment strategy are relatively straightforward, and can provide you with a framework for decision-making that can help you avoid the common pitfalls and stay focused on achieving your goals.

Here are 6 important steps to building a well-thought-out investment strategy that is flexible, suited to your unique situation, and built to withstand the most difficult market conditions.

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1. Start with a firm understanding of your goals and needs

Before you can invest effectively, you need to have a solid understanding of why you are investing. Take some time to explore and evaluate what your objectives are. Be clear about what motivates you. Clearly articulate both your long-term investment goals and your short-term financial needs. Get specific about timing: For each of your goals, when do you expect to need this money? All investing involves risk—be honest with yourself about how much risk you feel you can tolerate given your current financial situation.

With this information at hand, you can begin to devise an appropriate asset allocation and a tax-sensitive investment strategy that can help you invest in the asset classes and accounts that best fit your goals.

2. Build and maintain a well-diversified portfolio

How your assets are allocated across different asset classes provides a solid foundation upon which your portfolio may be able to grow over time. It can be a major factor in long-term performance: In fact, up to 90% of the variability of a fund's return over time can be explained by how its assets are allocated.1

Over the long term, holding a diversified portfolio has historically been shown to reduce risk. Developing a portfolio allocation with a thoughtful balance of asset classes may provide you with both the return potential necessary to make progress toward your long-term goal and the stability to help you navigate choppy markets without feeling compelled to abandon your plan.

Regular rebalancing is necessary to ensure that your allocation stays close to its target, as over time the distribution of value among the various asset classes may drift due to changes in the market. "Investors who don't rebalance their portfolios may experience more volatility than they anticipated after a period of rising stocks," says Naveen Malwal, institutional portfolio manager for Strategic Advisers, LLC. "Whereas investors who don't rebalance after a period of stock market volatility may miss out on some or most of an eventual recovery. Rebalancing may help clients feel more confident in their plan over the years." Additionally, it's important to stay vigilant to ensure that you are not overallocated in any single security, as that can present a significant risk to the health of your portfolio.

3. Take advantage of tax-smart investing techniques

The amount you pay in taxes can make a significant difference in your long-term investment returns. A study of pre- and after-tax investment returns from 1926 to 2022 showed that investors who didn't account for taxes when making investment decisions saw their annual returns reduced by 2% on average.2

Tax-smart investing techniques such as asset location, selecting tax-efficient securities, and tax-loss harvesting may have a substantial impact on your portfolio's long-term growth. But beyond these important considerations, it's important to also keep an eye out for any unexpected tax exposure. For example: In some circumstances, an investor may be required to pay capital gains taxes on a mutual fund investment that they may not have even sold and that perhaps even declined in value. There are several options for investors interested in ways to help mitigate this risk, such as swapping out existing, tax-inefficient mutual funds for tax-managed equivalents or replacing them with a separately managed account (SMA).

"Investors can't control what markets will do, but they can take steps to invest more tax-efficiently," says Malwal. "This may help investors keep more of their gains after taxes."

4. Stick to your plan and stay invested

In tough markets, it's easy to fall prey to your fears and end up making an emotional decision about your money. It's not uncommon for investors to move their money to cash or switch to a more conservative asset allocation. However, these moves may be counterproductive. Historically, many investors who moved out of stocks during down markets didn't fare as well as those who stayed the course, as they often missed out on subsequent rallies.

"Periods of market volatility may be some of the most challenging for investors," says Malwal. "Yet if you look back at 2020, or 2008, or other big market corrections, stocks eventually recovered and went on to make new all-time highs. Investors who stayed invested through the downturn were more likely to fully participate in the recoveries than those who shied away from stocks after the decline."3

Sticking to your plan and staying invested can be advantageous even when things seem dire. For instance, missing just the 5 best days in the market between 1980 and 2022 could have reduced portfolio returns by as much as 38%.4 This can be easier said than done, however. Thankfully, there are some steps you can take to help yourself weather the emotional and financial stress that comes with challenging market conditions. You can:

  • Learn about common investing biases and how to combat them so you don't overreact in periods of volatility.
  • Explore defensive investing, which may help protect your portfolio from steep market declines (at the expense of some potential returns). A defensive portfolio may seek to include more conservative stock investments, high-quality bonds, and alternative investments that are less correlated to the performance of traditional asset classes.
  • Consider developing a steady stream of reliable income that isn't dependent on market-based sources (e.g., bonds, dividends, or fixed income annuities), so you aren't stressed about covering your necessary expenses and can better weather near-term volatility.

5. Involve your family when planning and making decisions

If you and your partner have multiple accounts across multiple firms, it can be difficult to develop and maintain a shared vision for your financial future. Working together to create a holistic, all-inclusive plan could be beneficial and may help you identify opportunities to potentially reduce your overall tax burden and help to enhance your long-term investment returns. It may also help you stick to your plan when things get challenging.

If you have young children, it may be wise to get them involved as well—to a degree that is appropriate for their age. That way, they can begin to build the skills necessary to manage their own finances, or act as responsible stewards of the family's money, when the time comes.

6. Consider partnering with a trusted financial professional

If you enjoy managing your own finances and feel confident in your investment knowledge and capabilities, you may be happy to play the role of investment manager for your portfolio. There are, however, other options that can relieve you of some (or most) of these responsibilities, should you prefer it, including full professional management or a more balanced division of responsibilities, such as through a separately managed account (SMA).

While professional management often comes with a cost, industry studies estimate that professional financial advice can add up to 5.1% to portfolio returns over the long term, depending on the time period and how returns are calculated.5 Good financial professionals will work with you to create a personalized investment plan and identify opportunities to help grow and protect your assets. They may also act as a sounding board during times of uncertainty, helping you maintain focus and composure when markets are volatile.

Keep it simple

A good plan is one you understand inside and out and can stick to, even when times are tough. By following these 6 steps, you may be able to develop an investment strategy that will serve you and your family well into the future.

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1. "Does Asset Allocation Policy Explain 40%, 90% or 100% of Performance?”, Roger G. Ibbotson and Paul D. Kaplan, Financial Analysts Journal, January/February 2000. Diversification and asset allocation do not ensure a profit or guarantee against loss. 2. Taxes Can Significantly Reduce Returns data, © 2023 Morningstar, Inc. All rights reserved. Past performance is no guarantee of future results. 3. This example reflects a 97-year period from 1926 to 2022 and is based on the following data: stocks at 10.1%, stocks after taxes at 8.2%, bonds at 5.2%, and bonds after taxes at 2.9%. 4. Based on hypothetical growth of $10,000 invested in the S&P 500 Index 1/1/1980-6/30/2022. Source: FMRCo, Asset Allocation Research Team, as of June 30, 2022. Past performance is no guarantee of future results The hypothetical example assumes an investment that tracks the returns of the S&P 500® Index and includes capital gains and dividend reinvestment but does not reflect the impact of taxes, fees, or expenses, which would lower these figures. It is not possible to invest directly in an index. All indexes are unmanaged. "Best days” were determined by ranking the one-day total returns for the S&P 500 Index within this time period and ranking them from highest to lowest. There is volatility in the market and a sale at any point in time could result in a gain or loss. Your own investment experience will differ, including the possibility of losing money. 5. Depending on the time period and how returns are calculated. Value of advice sources: Envestnet’s “Capital Sigma: The Advisor Advantage” estimates advisor value add at an average of 3% per year, 2023; Russell Investments 2023 Value of a Financial Advisor estimates value add at approximately 5.12%; and Vanguard, “Putting a value on your value: Quantifying Vanguard Advisor’s Alpha®,” 2022, estimates lifetime value add at an average of 3%. The methodologies for these studies vary greatly. In the Envestnet and Russell studies, the paper sought to identify the absolute value of a set of services, while the Vanguard study compared the expected impact of advisor practices to a hypothetical base-case scenario.

Past performance is no guarantee of future results.

Investing involves risk, including risk of loss.

Annuity guarantees are subject to the claims-paying ability of the issuing insurance company.

Alternative investments are investment products other than the traditional investments of stocks, bonds, mutual funds, or ETFs. Examples of alternative investments are limited partnerships, limited liability companies, hedge funds, private equity, private debt, commodities, real estate, and promissory notes.

Some of the risks associated with alternative investments are:

- Alternative investments may be relatively illiquid.
- It may be difficult to determine the current market value of the asset.
- There may be limited historical risk and return data.
- A high degree of investment analysis may be required before buying.
- Costs of purchase and sale may be relatively high.

This information is intended to be educational and is not tailored to the investment needs of any specific investor.

Diversification and asset allocation do not ensure a profit or guarantee against loss.

Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risks, including the loss of principal.

In general, the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk, and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so holding them until maturity to avoid losses caused by price volatility is not possible. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.

Investment decisions should be based on an individual’s own goals, time horizon, and tolerance for risk.

Fidelity advisors are licensed with Fidelity Personal and Workplace Advisors LLC (FPWA), a registered investment adviser, and registered with Fidelity Brokerage Services LLC (FBS), a registered broker-dealer. Whether a Fidelity advisor provides advisory services through FPWA for a fee or brokerage services through FBS will depend on the products and services you choose.

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