How to Think Long Term When Planning Your Personal Finances
If you want to get the best possible results from your investment portfolio, you have to adopt a long-term mindset. That means thinking ahead 10, 20, even 30 years or more, rather than about the next few months or an even shorter time horizon.
If you’re not used to approaching investment strategy from such a long-term perspective, it might pose a challenge. But given the right strategies, you could change how you think about investments and adopt better habits for your financial future. Before you proceed on reading this article, you can check out this website for insights on how to manage your personal finances.
Why Long-Term Thinking is so Important
Why is long-term thinking such a big deal in the investment world? Here are just some of the reasons.
· Compound interest. Compound interest applies to both your initial principal and past interest earnings. Because of this “stacking” effect, compound interest can quickly multiply your savings (or your debts!). The sooner you pay off your high-interest debt, the more money you’ll save. The sooner you start investing, the more money you’ll earn. Over the course of a few decades, even small changes can have a massive impact on your overall financial picture and the future.
· Risk mitigation. Thinking over the long run gives you a better sense of your risk – and how your tolerance for it might evolve in the future. If you’re still young and have plenty of time, you could afford bolder and riskier moves.
· Stability and emotional resilience. Placing your decisions within a long-term period can lead to more stability and emotional resilience. In other words, you aren’t apt to make as many emotional decisions – and you’re less likely to deviate from your strategy.
· Peace of mind. When your long-term plan requires 30 years to unfold, the events of a week, or even a full year, won’t feel like that big a deal. You may derive significant peace of mind from thinking long term.
So what can you do to accomplish this?
Setting Your End Goals
The first step is to set and evaluate your final goals. What are you hoping to achieve? What is your desired position toward the end?
For example, are you hoping to retire by age 60? Would you prefer to achieve a net worth of $2 million by a certain age? Do you desire a portfolio capable of generating a particular level of monthly income?
There are many reasonable goals you may strive for. What’s essential is that you know what you’re trying to achieve – and when you seek to achieve it.
Planning, Decade by Decade
Next, start planning how you’re going to shift your investment strategy over the course of several decades. For most people, this means gradually reallocating their funds into less risky, more consistent assets.
In your 20s, you might get away with almost exclusively high-risk, high-reward investments, since you’ll have plenty of time to make up for any losses. In your 30s and 40s, you’re likely to start shifting more of your capital into real estate or other asset classes.
You may also have more income to invest, so you can step up your retirement savings and start thinking about an income-based portfolio. By your 50s and 60s, you’ll be reallocating your net worth into stable, reliable, income-generating assets.
How to Embrace Long-Term Thinking
You could also use some emotional and cognitive strategies to embrace long-term thinking – and make certain your ultimate goals are achievable.
· Stick to your plans. When you make plans, stick with them. Don’t alter your investment decisions or jump at impulsive trades because the mood happens to strike you. Obviously, you’ll have to revisit and possibly change your plans now and then, but for the most part, you should try to stay with them consistently.
· Ask yourself about the long-term impact of each decision. Whenever you’re faced with a major financial decision, think about how you might feel with regard to that choice over the long run. It’s possible you could double your investment or lose everything in the next few days; but how much of an impact is either outcome going to have on you when you’re closer to retirement?
· Hedge your bets. Diversifying your portfolio and hedging your bets are always good tactics, especially as you inevitably become more risk averse. It’s hard to tell what the long-term future may hold, so it’s crucial to cover all your bases.
· Avoid impulsive decision making. If you’re prone to impulsive decision-making now, try to spend some quality time in introspection. Get to the bottom of your habits. Impulsive decisions have the potential to ruin the best-laid investment portfolio, and you don’t want that to happen to you somewhere down the road.
If you construct more long-term plans and pursue decades-long decision making, you’ll put yourself in a position to accumulate wealth faster and generate more reliable income. One step at a time, you could build the financial future you desire for yourself.