"Those who cannot remember the past are condemned to repeat it."
These wise words are most commonly attributed to George Santayana, a Spanish-American philosopher, poet and humanist. He lived in the mid-1800s, but his wisdom is as relevant today as ever – especially to anyone focused on long-term investing.
On the surface, long-term investing seems to be about predicting what the world will be like in a month, year or decade. After all, you're working to build yourself a better financial future.
But in reality, successful long-term investing is actually about learning from the past and understanding the present.
Companies come and go. More often than not, initial public offerings aren't the only opportunity to invest. And nobody really knows for sure what the future will hold.
But everyone can understand what has worked in the past – and apply those principles to the present.
With that in mind, it's time to look at seven time-tested, proven principles for successful long-term investing:
1. Plan for a long life
According to the Centers for Disease Control and Prevention, the life expectancy for Americans is 78.8 years.
The last thing you want to do is run out of money. That's why it's important for you to have a truly diversified portfolio that includes stocks and alternative investments, such as life settlements.
2. Focus on cash flow
It has been said that cash is king, but this isn't always true. In the era of super-low interest rates, the yield on most cash investment tools is almost zero. As the Federal Reserve slowly increases interest rates to more realistic levels, it's important to make sure an over-sized allocation to cash doesn't hurt your ability to achieve your long-term investment goals.
3. Leverage dividends and compounding
Dividends can make an enormous difference in the value of your portfolio. Consider that a $10,000 investment in the S&P 500 price-only return index would have increased to more than $200,000 since 1970. But when you factor in dividend payments (reinvested) and compounding, it would be worth more than $900,000 today.
4. Avoid emotion
Emotions and investing do not belong together. Badly timed and emotionally charged investment decisions can cost you dearly – both in the short- and long-run.
In order to avoid emotional investment decisions, make sure you have a solid plan – and then stick to it.
5. Accept and anticipate volatility
It has been said that the only things in life that are guaranteed are death and taxes. Well, you can add stock market volatility to the list.
The sooner you can accept and learn to anticipate volatility, the better. That means having a truly diversified portfolio that includes alternative investments.
6. Staying invested always makes sense
Too many investors (or their advisers) believe that they can outsmart the market. They play a game related to market timing – and they often get burned.
It could be fear, greed or life circumstances that makes them yank their money out of their investments, but the reason doesn't really matter. As Warren Buffett has said, the stock market will always go up over time and staying invested always makes sense.
7. Diversification is the key
If the past 10 years have taught investors anything, it's the importance of diversification.
The volatile and tumultuous ride that the stock market has taken everyone on has shown that geopolitical conflicts, natural disasters and sheer greed can ruin a portfolio in a hurry – unless it is diversified.
Investing in things (such as life settlements) that are not affected by the ups and downs of the stock market is a great way to protect yourself. But in order to protect yourself, you must diversify.