The Trader’s Long-Term Investing Plan

Successful active traders are masters of the short-to-intermediate term, employing a combination of discipline, adjustment and repetition to maximize their profits.

But for the vast majority of traders, the biggest earnings potential is in their long-term investment portfolios, not in their trading accounts. No matter how successful you are at trading in the near term, you will be hard-pressed to beat the returns in your investment portfolios, says Kevin Horner, Senior Manager of Trading Services Education at Charles Schwab. Because of this, Kevin argues that no trader should have less than 80 percent of their total assets in their longer-term savings.

When it comes to managing that money, he says traders need to approach their long-term investments as intentionally and as methodically as they do their short-term holdings. He believes every trader should have a financial plan to help manage their savings.

Research consistently shows that planning generates wide-ranging benefits. A recent Schwab survey of 1,000 Americans, for instance, found that those who were following a financial plan rated the highest in accumulating wealth, effectively managing debt, and achieving their savings goals. This, in turn, makes it easier to stomach volatility in your trading results.

“At the end of the day, your financial plan helps build your safety net,” Kevin says. “My long-term portfolio is what gives me the comfort to trade.”

There are key differences when managing investments for short-term profit and long-term gain, and some strategies for the latter are the polar opposite of what you would do for the former. Kevin says five strategies in particular can help differentiate between them.

#1 - Shift your targets

Before you enter a trade, you have a clear objective in your mind of what you want to accomplish. This is usually the profit you hope to make on the trade, and it helps identify the price the stock needs to reach for that to happen.

But, in a financial plan, you need to shift your thinking from price targets to savings targets. Identify the reasons why you’re saving and investing by setting out specific goals. In addition to retirement, you might want to put your kids through college, purchase a second home, or start a business.

Once you know your goals and prioritize them, it makes it that much easier to assess how much it will take to achieve each one. It also makes it simpler to set your asset allocations for each goal, with shorter-term objectives demanding more conservative investments and longer-term ones enabling you to be more aggressive.

#2 - Keep your accounts separate

In trading, the key is to limit your losses and let your winners run. But many make the mistake of letting their trading losses turn into even bigger ones rather than accept defeat. “You see it all the time,” Kevin says. “The trader mentally moves a losing position in their trading portfolio over to their investment portfolio so it has time to recover.”

Kevin says it’s important for any trader to delineate clear lines between their trading and investing activities. When initiating any new position, decide which portfolio it’s going to reside in—and leave it there. When you’re going through a tough slump, never take money from your investment portfolio to replenish your trading account. If any money is moving between the two portfolios, it should be taking some of the profits from your trading account and adding them to your long-term portfolio to help achieve your savings goals.

#3 - Don’t micromanage

While you have to keep a watchful eye on your trading account as part of being a successful trader, it usually pays to do the exact opposite with your long-term investments. “Staying invested is the most important component of long-term investing success,” Kevin says. “That means sitting on your hands sometimes, especially when volatility spikes.”

Instead of trying to time the market with your long-term portfolio, start a routine of investing at regular intervals. The Schwab Center for Financial Research recently concluded that an investor with perfect timing in adding new money to new positions (buying at the market low each year) would have been only marginally more successful over a 20-year span than one who invested in stocks the first day of each year or one who invested in stocks at the market top every year.

Bar graph illustrated four hypothetical investors who invested $2,000 a year for 20 years: Perfect Timing ended up with $176,679, ASAP ended up with $163,918, Bad Timing ended up with $142,612, All Cash ended up with $64,925

#4 - But check-in periodically

Along the same lines, you don’t want to neglect your investment portfolio. Your financial situation or your goals may have changed, necessitating changes to your holdings. In addition, risks can needlessly pile up if you let your investments stray beyond your asset allocations. During the current bull market run, for instance, surging stock values have pushed many equity allocations beyond their target ranges, adding more risk to portfolios.

At least once a year, Kevin says, form a habit of rebalancing your long-term portfolio to get your asset allocations back in line. Typically this means selling out of some of your biggest gainers for the year and adding to your biggest losers. “Over the years, I’ve become more excited when my rebalancing window comes up,” Kevin says. “It’s a great opportunity to reflect on the year, what’s worked, and what hasn’t. I get energized by revising my thoughts from when I first bought these positions, and I’ve grown to enjoy the process.”  

#5 – Diversify your tax exposure

Stop and limit orders are a trader’s best friend for managing day-to-day downside risk, but for long-term investments, diversification fills this role. But in addition to spreading your investments across a range of asset classes, it may also makes sense to diversify your tax exposure by investing through several types of accounts that treat taxes differently.

Many savers rely on tax-deferred accounts, assuming their tax liability will be lower when their income declines in retirement. But your tax situation can change for better or worse due to a host of factors, including tax policy. After maximizing any 401(k) or other employer-sponsored accounts you have access to, consider investing in a Roth individual retirement account (IRA) instead of another tax-deferred account, if you qualify. That way you maintain flexibility when it comes to withdrawing funds in the future, while minimizing your tax hit.

Keeping emotions in check

Trading and investing might seem similar in a lot of ways, but they demand a different mindset and approach. Both endeavors share a trait for success, though, and that’s discipline. “Whether you’re trading for the short run or investing for the long haul, emotions can get in the way and steer you off course,” Kevin says. “Having a plan helps keep you on the straight and narrow so you can achieve your goals, whatever they may be.”


What You Can Do Next

    • Learn more about investment advice at Schwab, including how we can help with long-term planning and annual rebalancing.
    • Schwab is happy to discuss your portfolio whenever and wherever it’s convenient for you. Call us at 877-807-9240visit a branch or find a consultant.
    • Interested in investing now? Open an account.