Money & Finance

Principles That Hold Up Across Decades of Investing Research

Updated Mar 11, 2023·6 min read
Share
A long winding road through green fields leading toward a bright, sunlit horizon

In This Article

Key Takeaways

Diversification can reduce certain portfolio risks but cannot eliminate the possibility of loss.
Keeping investment costs low is one of the few factors investors can directly control.
Consistent, patient investing tends to outperform attempts to time the market.
Tax-advantaged accounts can meaningfully accelerate long-term wealth accumulation.
Revisiting your asset allocation periodically helps keep your portfolio aligned with your goals.

Every decade produces a new wave of investment trends — from dot-com stocks to cryptocurrency to meme investing. Most fade. What remains, decade after decade, is a set of principles backed by rigorous financial research and the lived experience of millions of investors. Understanding these principles won't guarantee profits — no approach can — but they give everyday investors a rational, evidence-grounded foundation to build on.

If you're new to investing, our guide to investing essentials covers the core vocabulary — stocks, bonds, compound interest — before you dive deeper here.

“The stock market is a device for transferring money from the impatient to the patient.”

— Warren Buffett, Longtime investor and chairman of Berkshire Hathaway

The Core Principles That Research Supports

The following practices aren't theoretical. They emerge from decades of academic and market research — from work on efficient markets to behavioral finance to long-run asset-class returns. Individually, each makes a difference. Together, they form a coherent investing philosophy that holds up across market cycles.

1

Diversify across asset classes, not just within one

Research consistently shows that spreading investments across asset types — such as stocks, bonds, and real estate — can reduce the impact of any single asset's poor performance on your overall portfolio. However, diversification reduces certain risks without eliminating all risk. Our companion piece on what diversification can and can't do explains the limits honestly.

Example: An investor who holds a mix of domestic stock funds, international funds, and bond funds may experience less volatility during a domestic market downturn than one concentrated in a single sector.
2

Minimize investment costs wherever possible

Expense ratios, trading commissions, and advisory fees compound over time just as returns do — but in the wrong direction. Research by economists studying mutual fund performance has found that lower-cost funds tend to outperform higher-cost alternatives over long periods, in part simply because less return is surrendered to fees.

Example: Choosing a broad index fund with a 0.05% annual expense ratio over an actively managed fund charging 1.0% can result in meaningfully more accumulated wealth over a 30-year horizon, even if gross returns are similar.
3

Invest consistently rather than trying to time the market

Market timing — moving in and out of investments based on predictions about short-term price movements — is extraordinarily difficult to do successfully over time, even for professional investors. Regular, consistent investing (sometimes called dollar-cost averaging) removes the pressure of prediction and smooths out the impact of market volatility.

Example: An investor who contributes a fixed amount to a retirement account each month, regardless of market conditions, automatically buys more shares when prices are low and fewer when prices are high.
4

Use tax-advantaged accounts to their full potential

Accounts like 401(k)s and IRAs allow investments to grow either tax-deferred or, in the case of Roth accounts, tax-free. The tax savings over decades can substantially increase the amount of wealth available at retirement compared to equivalent investing in taxable accounts.

Example: Maximizing annual contributions to a Roth IRA early in a career means decades of potential compound growth that will not be subject to income tax upon qualified withdrawal.
5

Rebalance your portfolio periodically

Over time, asset classes grow at different rates, causing your portfolio's allocation to drift from its original targets. Periodic rebalancing — selling some of what has grown and buying more of what has lagged — keeps your risk level aligned with your goals and investment timeline.

Example: If a portfolio targets 60% stocks and 40% bonds but a strong stock market pushes it to 75% stocks, rebalancing restores the original risk profile before volatility can cause outsized losses.
6

Maintain a long investment horizon and resist panic-selling

Historical data on equity markets shows that downturns, while inevitable and sometimes severe, have been followed by recoveries over sufficiently long periods. Investors who sell during downturns lock in losses and risk missing the recovery. Staying invested during volatility is one of the most research-supported behaviors associated with better long-term outcomes.

Example: During a significant market decline, an investor who holds their diversified portfolio rather than selling avoids crystallizing losses and retains the ability to benefit from the eventual market recovery.

Quick Actions to Put These Principles to Work

Understanding principles is one thing — applying them is another. The gap between knowing and doing is where most investors lose ground. Whether you're just starting out or reassessing an existing portfolio, these actions can help you move from intention to practice. And if you've already made some early missteps, our article on common early investing errors can help you course-correct.

high Check the expense ratio on any fund you currently hold or are considering — look for options under 0.20% annually.
high Set up automatic contributions to a retirement or brokerage account so you invest on a fixed schedule without relying on willpower.
medium Review your current asset allocation and compare it to a target based on your age and risk tolerance.
high Confirm you are contributing at least enough to a workplace retirement plan to capture any available employer match.
medium Write down your investing time horizon and primary goal — retirement, a home, education — to anchor future decisions.

Building the Foundation Before You Invest

Sound investing doesn't happen in isolation. It rests on a solid financial foundation — including a workable budget and a plan for managing debt. If those areas need attention, exploring budgeting basics or saving and debt strategies can help you build the stability that makes long-term investing possible.

These Principles Are a Starting Point, Not a Plan

The principles discussed here reflect broad consensus from decades of financial research — but they are general in nature. Your individual circumstances, tax situation, risk tolerance, and time horizon all affect which strategies are appropriate for you. A licensed financial adviser or fiduciary can help translate these principles into a plan tailored to your specific goals.

This article is for general informational and educational purposes only and does not constitute personalized financial, investment, tax, or legal advice. Investing involves risk, including the possible loss of principal. Past performance does not guarantee future results. Consult a qualified financial adviser before making decisions about your own situation.

Money & Finance Editorial Team is the collective byline for our editorial team and contributor network. Articles published under this byline or an editorial pen name are researched, written, and reviewed according to our editorial standards for clarity, consistency, and independence before publication.

View all articles by Money & Finance Editorial Team →
Disclaimer: The content on this site is for informational purposes only and is not a substitute for professional advice. Always consult a qualified professional for guidance specific to your situation.