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A 9-Point Checklist for Long-Term Investors


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Someone recently won  a $540 million Mega Millions lottery jackpot, but that person did so against astronomical odds, of about one in 259 million. Getting rich that quickly isn't remotely likely for you or me, but here's some good news: You can grow your wealth substantially over the long run. That's how investors such as Warren Buffett and John Bogle ,the father of index funds, did it. Here's a nine-point checklist for long-term investors, to help you.

1. Are you ready to be patient?

It should be obvious that if you're going to be a successful long-term investor, you'll need to be patient. But that can be easier said than done, if you've held a promising stock for, say, a year, and it hasn't moved too much. Remember that frequent trading in and out of stocks is hazardous to your finances. It will result in more trading commissions and more taxation of gains at the generally higher short-term capital gains tax rate. And it will mean that you miss out on gains that finally happen after you sell.

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2. Are you ready to stomach volatility?

Be prepared for volatility, and don't let yourself be swayed by your emotions. If the market suddenly dives, as it will likely do from time to time, don't panic and sell your shares of stock in perfectly good companies. That's a recipe for losses instead of gains -- partly because while you might avoid further drops, you'll also likely miss out on much of the recovery. Market timing can sound sensible, but it's impossible to know just when the market is done dropping or rising.

3. Are your investments diversified?

You may be most excited about some market niche, such as solar energy or Brazilian stocks, but if you put too many of your investment eggs in one or a few such baskets, you can get whacked if the industry faces some major challenges or if a certain geographical region enters an economic downturn. Spread your hard-earned dollars across different kinds of investments.

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4. Are you planning to research your stocks and funds?

If you see yourself investing in individual stocks and perhaps some managed mutual funds, as well, then you'd better plan to spend considerable time researching them. You want to only buy when you strongly believe in a company's future, based on your research, or when you have great faith in a fund's management. If you don't know much about your holdings, you may not notice when their fortunes change and when selling might be smart. You need to understand a company's business model -- exactly how it makes its money -- and its sustainable competitive advantages. Perhaps write down reasons to buy a given stock as well as reasons not to, and then weigh the pros and cons.

5. Are you planning to keep up with your investments?

If you're not going to keep up with your investments by following them in the news and reading their quarterly and annual reports, then you'll probably be best off just sticking with a simple, inexpensive broad-market index fund, such as one based on the S&P 500. If you do have the time and interest to keep up with your holdings, be sure to own a manageable number of them. If you have a portfolio of 100 stocks and you aim to spend an hour each quarter reading up on them, that will come to 33 hours per month -- roughly the equivalent of four work days and most likely an unattainable goal.

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6. Are you prepared to let winners keep winning?

Some investors are happy when a stock grows in value by a certain amount -- say, 20% or maybe even 100%. At that point, they may sell, in order to "lock in" their gains. It's may be nice to have gains locked up, but if that stock is tied to a healthy company that's still growing, you might make much more money by just letting that winner keep winning, for years. Many investors make a related mistake -- hanging on to losers for too long, in the hope that they will regain some of their losses. Instead of keeping money in stocks where you no longer have much confidence, it's smarter to sell and move whatever money remains into stocks you do believe in. Aim to make up your losses via more promising stocks.

7. Are you willing to change your mind?

It's rather important when engaging in long-term investing to be willing to change your mind. Accept that some wonderful stocks may not be so wonderful in a few years. Consider that conventional wisdom is sometimes wrong and by shifting your perspective, you might spot some great opportunities. Some of the best investment opportunities lie in stocks that others have left for dead. If your research suggests they may recover and do well, they may be smart investments. Keep your mind flexible -- especially as you keep reading and learning about investing. Even Warren Buffett has changed his views: Whereas he began by seeking good companies trading for great prices, he shifted to favoring great companies trading at good prices.

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8. Are you planning to use retirement accounts?

You can maximize your gains by making the most of retirement accounts such as IRAs and 401(k)s. The traditional forms of both will give you upfront tax breaks, resulting in more money that you can invest -- while the Roth versions promise tax-free withdrawals if you follow the rules. Being able to take $200,000 out of a Roth IRA in retirement without paying any taxes can save you tens of thousands of dollars.

9. Are you able to learn from your mistakes?

Finally, be sure to learn from your mistakes. Otherwise, you'll keep making them and will keep paying the price for each of them. Better still, learn from other people's mistakes and save even more money.

Long-term investing is a smart way to build wealth. For best results, take it seriously and work at it, continually reading, thinking, and learning.

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Longtime Fool specialist Selena Maranjian, whom you can

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