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Long-term investing strategies

There's been no better illustration of stock market volatility than the events of fall 2008.

In the week ending Oct. 10, the Dow Jones Industrial Average plummeted 18 percent, leaving it down 40 percent from its high in October 2007. The S&P 500 also lost more than 40 percent of its value from the previous year. Almost every asset class, from international stocks to commodities, felt the pain.

Hand-wringing and teeth-gnashing ensued. Then by election day, the Dow Jones rebounded 14 percent. But the rally was short-lived as the market resumed a seesaw course.

It dawned on many investors that their true tolerance for risk was quite a bit lower than they had assumed. According to TrimTabs Investment Research, investors pulled $43.3 billion out of equity mutual funds the week ending Oct. 8, compared to about $7.2 billion the week before.

Is it a good idea to bail when things get bad? What's the best way to invest, regardless of market conditions? The jury is still out on the best strategy, but here we present several approaches used by professionals. Some require a little bit of attention upfront, while others require constant work and vigilance.

Long-term investing strategies:
  • Check asset allocation
  • Passive investing
  • Fundamental analysis
  • Technical analysis
  • Market timing
  • Pick a plan

Check your asset allocation

The current market volatility should serve as a reminder of the magnitude of losses that can be sustained in a short period. It also underscores the importance of having a diversified portfolio and appropriate asset allocation.

Getting your asset allocation mix right for your risk tolerance and time horizon is the first key step, says Scott Donaldson, a senior investment analyst with Vanguard's Investment Strategy Group. "Then you choose the asset allocation, sub-asset allocation and then finally the individual investments" to make up your portfolio, he says.

A conventionally conservative allocation is split between 60 percent stocks and 40 percent bonds. The next step is to consider how to allocate money to specific asset classes, such as large-cap stocks, small-cap stocks, high yield bonds, inflation-protected securities and so forth. Then finally, the real work begins -- choosing investments to populate the asset allocation plan.

Investors can follow one of two basic strategies when choosing their investments. A passive strategy uses index funds or exchange traded funds, known also as ETFs, that mimic a sector of the market or a broad market benchmark such as the Standard & Poor's 500.

An active strategy requires the investor to choose stocks or actively managed mutual funds in an attempt to beat the returns of the market. To make things even more complicated, investors who use an active strategy can take one of several approaches.

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Passive investing
Passive investing has its advantages. For one, it's almost a set-it-and-forget-it strategy. Almost.

A purely passive strategy would be buying an S&P 500 index fund and then never touching it again.

"I think that a strategy that doesn't involve any selling whatsoever is more of an act of faith than anything else," says Alex Green, author of "The Gone Fishin' Portfolio: Get Wise, Get Wealthy ... and Get on with Your Life."

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