A Beginner’s Guide to Long-Term Investments

Key Takeaways


One of the few surefire ways to secure your financial future is through long-term investing. 2020 has shown us that markets are susceptible to volatility when unexpected things happen. The best and most secure way to build your wealth is incrementally, and over many years. Keep reading to find out why long-term investing strategies often prove to be more fruitful than their short-term counterparts.

What Is Long-Term Investing?

Long-term investing is a strategy where an individual buys stocks or assets with an intent to hold onto them for a long period of time. A time span of one to five years can be considered long term, but some investors might hold on to a particular investment for decades. This is opposed to short-term investors who plan for a quick cash-out at a higher risk, but a lower reward.

Although long-term investments require patience and discipline, they come at a much lower level of risk. Those who can hold out will enjoy a great accumulation of interest and value.

long term investments

What To Consider Before Long-Term Investing

Before you try your hand at long-term investing, it’s important to take some questions into consideration. First off, what are your financial goals? Are you looking to secure your financial future, or are you looking for a quick way to make some cash? If you have long-term financial goals such as saving for retirement or paying for your child’s education, then long-term dividend investing aligns well with your goals.

Other important considerations include your time horizon and risk tolerance. How much do you want to earn, and in how much time? To get a higher return, you’ll need to take on more risk. Lower-risk investments tend to have a lower yield, but can be beneficial if you’re able to commit to a longer time horizon.

Some of this boils down to your ability to tolerate risk and your level of patience. For instance, will you have the discipline to hold out when you encounter fluctuations in the market? There is no right or wrong answer when picking investing strategies; it’s a matter of understanding yourself, your goals, and identifying the right fit.


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Types Of Long-Term Investments

Now, you may be wondering exactly what constitutes a long-term investment. As it turns out, there are several types of long-term investment strategies available for your picking. The really fun part about investing is that you don’t have to stick within one category. Rather, diversification is encouraged as a great way to secure your assets. U.S. News Report provides a great overview on diversification and its benefits. Peruse the following long-term investment types to see which ones sound like a good fit for you.

  • Stocks: When someone thinks of investing, stocks are usually the first to come to mind. Although stocks can be short-term in nature, you can turn it into a long-term strategy by investing in those that will appreciate in value over a long period of time.

  • Bonds: You can buy bonds from corporations, municipalities, and even the U.S. Treasury. By choosing bonds that have maturity dates that are in line with your timeline, you’ve got yourself a low-risk investment on your side.

  • Mutual Funds & ETFs: Mutual funds and ETFs are similar to stocks, but come in the form of a portfolio. Individuals place their investments into these portfolios that are selected by fund managers. It’s almost as though you are placing your bets on the expertise of the manager, rather than directly into a stock.

  • Certificates of Deposit: A CD is a certificate you receive in exchange for providing funds to a bank. The certificate will state how much you deposited, the interest rate, and the predetermined time frame that was selected. The longer your CD’s term is, the more you’ll earn back in interest.

  • Real Estate: Investing in real estate is a great option because it can help you earn ongoing passive income on top of appreciating in value over time. Plus, it’s a tangible asset with multiple exit strategies for you to use to your advantage.

The Best Long-Term Investment Strategies

Achieving financial success is not possible without having a strong long-term investing strategy in place. Knowing how to select the right types of investments is worthless if you don’t know how to manage your accounts or any returns you make. The first recommendation is to balance your finances.

  1. Balance Your Finances: Balance appears to be the key to everything in life, including your finances. Focusing too much on one type of investment over the other, or being overly aggressive with your strategy, could get you into trouble. Diversification is a great way to bring balance to your investment strategy.

  2. Know The Business Of Your Investments: In this case, ignorance will not help you achieve bliss. If you are betting your valued savings on an investment, then don’t go into it blind! Do your due diligence and make sure you understand the mechanics of investments to inform your decision-making.

  3. Begin Investing Early: Assets have a better potential to grow the longer they are invested. Any financial expert would encourage young people to start investing today, to ensure that you’re in better financial standing in the future. Someone who starts investing at the age of 20 will have a significantly larger return than someone who starts at 30.

  4. Take Advantage Of A 401(k) Match: If your employer offers a 401(k) or other retirement savings matching plan, take advantage of it! This is essentially free money. Your employer may have some stipulations, such as a minimum contribution in order to be eligible. However, these conditions are a small price to pay when you’re doubling your savings.

  5. Cash-Flow Management: Committing yourself to a cash flow plan is simple in theory, but maintaining your discipline is the hard part. Set up a system for yourself to automatically invest a percentage of each paycheck, so that you don’t feel like you’re missing the money.

  6. Invest Discretionary Income: What are your needs? What are your wants? It’s easy to trick yourself into thinking that your wants are your needs. Experts advise that you wisen up and invest as much discretionary income as you can. This will take discipline, but you’ll be thanking yourself in later years.

  7. Separate Investments & Cash Reserves: You can find yourself in a pickle if you are in need of quick cash, but all your money is tied up in investments. In an emergency, this might force you to sell your investments at a loss. Instead, protect your investments by building up a cash reserve in case of an emergency.

  8. Make Stock Investing Essential: The S&P 500 index has provided an average 7 percent return for 20-year investment periods since the 1920s. Being in the stock market, especially with compound interest, should be an essential part of your strategy.

  9. Diversify Your Investments: We can’t say it enough: diversifying your investments is the best way to protect against risk. Simply put, when one investment strategy fails, it’ll be less painful if you have backups in other areas. You can minimize your risk by investing in various assets that are characterized differently. Some examples include market capitalization, domestic vs. foreign, or growth-based vs. value-based.

  10. Only Make Small Adjustments: Being a great investor is like being a good sailor. You never want to make jerky moves or changes, because you’ll unintentionally end up over-correcting and get undesirable results. Investing should be thought of as a long game, where only slight changes are made. Patience and holding steady are two characteristics you’ll need to develop.

long term investing strategies

The Best Long-Term Investments For 2020

Now that you’re better versed in the different types of long-term investments, the next step is to figure out which investments will best fit your goals. The following list, starting out with real estate, covers what investors recommend as the best investments for 2020. Don’t worry, we’ve gone ahead and provided a run-down for each item on this list afterward.

  1. Real Estate

  2. Bond Funds

  3. Stock Funds

  4. Growth Stocks

  5. Dividend Stocks

  6. Small-Cap Stocks

  7. Robo-Advisor Stocks

  8. IRA CD

  9. Treasury Securities

  10. Gold

Real Estate

Before making any property purchases, you’ll want to make sure the market conditions are right. But when things go right, real estate can be one of the most dynamic long-term investments you can make.

Not only can you borrow most of the money you need to buy real estate, you can pay the bank back over time. Housing is a real, tangible asset that offers homeowners tax benefits. Real estate also provides you with a multitude of exit strategies. You can fix a property up and sell it, or you can hold it and let it appreciate in value, or you could rent it out and earn passive income.

Finally, real estate investors have the opportunity to refinance their home loan down the line. This process allows them to reinvest cash into other investments. Although a real estate purchase can be higher in risk, this risk can be mitigated with due diligence. When done right, the rewards can be great. If this is something that interests you, read more on why you should invest in real estate.

Bond Funds

A bond fund typically represents a portfolio of bonds, issued by an entity like a corporation or a government. Bond funds promise owners an annual interest payout that’s predetermined. At the end of the bond term, the issuer pays the owner the principal back.

The risk and reward levels change based on the issuer. Corporate bonds tend to be riskier than government bonds. However, because the terms are predetermined, bond funds are considered safe and stable overall.

Stock Funds

You’ve been wanting to get into the stock market game but don’t have the know-how or time for analysis. If this sounds like you, stock funds could be a great option. Much like bond funds, stock funds are a collection – or portfolio – made up of individual stocks. You may have heard of examples like the S&P 500 or Nasdaq-100 index funds. These broadly diversified funds provide a weighted average return from all of the companies. As a result, your risk is a bit more spread out than if you were to select individual stocks. There are also industry-based stock fund options as well.

Growth Stocks

Growth stocks are for investors who want to go fast and aren’t afraid of taking on some risk. These stocks are typically larger tech companies, like Facebook, or even Tesla. Investors are willing to pay a high price for these stocks because they are betting on the company itself. The desired results are high growth with high returns.

On the flip side, a bear market or recessions could bring about loss. If you can stomach this volatility and think you have the aptitude to place your bets on the right company, then growth stocks can be a great match.

Dividend Stocks

If you prefer a little more stability in your stock market strategy, then definitely consider dividends stocks as an option. These stocks tend to be associated with mature companies that have achieved a stable amount of growth. Because they don’t have as much of a need for cash as their younger, high-growth counterparts, they can afford to pay their share-owners’ dividends.

Of course, these companies are susceptible to market fluctuations and failure as well, so you’ll still want to be selective. However, if you can pick a solid workhorse that provides steady dividends, then you’re all set. Even better, some of these companies can increase their payouts several percentage points per year.

Small-Cap Stocks

You may not have heard of small-cap stocks before, and that’s because it’s typically the savviest investors who get into this game. These are the stocks of smaller companies that may eventually turn into a growth stock. Investors are looking into finding hidden gems that have a lot of potential. For example, Amazon started out as a small-cap company.

Investors who purchased shares from the very beginning and have held out until today are extremely rich. Of course, there are plenty of examples of failures as well. The risk is significant, but if you pick a winner, then the rewards can be astounding.

Robo-Advisor Stocks

Robo-advisors are a great option if you want someone to do the work for you, and you want a high level of customizability. When you select a robo-advisor, you typically fill out questionnaires where you provide information about your investing goals, risk tolerance, and time horizon.

Based on these goals, the robo-advisor automatically takes the money you’ve deposited and invests it on your behalf based on your investing profile. Some companies even offer the option of taking your earnings and depositing them back into cash or savings accounts for you as well.

IRA CD

If you happen to be extremely risk-averse, then consider investing in a certificate of deposit (CD) that is inside of an IRA (individual retirement account.) IRA accounts are tax-friendly and are a way you can tuck your money away for many years and let the interest accrue.

These accounts are typically guaranteed by the FDIC as well. When the CD reaches maturity, you will receive your principal plus interest. However, keep in mind that the growth of your safe investment is in competition with inflation.

Treasury Securities

It’s truly a sign of a capitalist economy when even your government needs investors to operate. In our case, the federal government issues securities so that they can raise funds to pay back debts and to pay for projects. These Treasury securities have three types: bills, notes, and bonds.

The key difference between these types are the time horizon (from shortest to longest), and all are considered risk-free. The U.S. government itself is guaranteeing that these securities will be paid back in full. A second difference is whether you purchased the security at a discount and you’re paid back at full face value. The other option is that you purchased the security at full face value, but you’re paid back via interest.

Keep in mind that the Treasury is also subject to inflation, so your earning power depends on your interest rate against the inflation rate.

Gold

Scrooge McDuck comes to mind when anyone mentions gold investing, but it can be so much more than that. You can invest in gold mining companies, gold futures, or even gold ETFs! Gold is known for its high liquidity, and the asset itself is used in a wide array of industries across the globe. If you want to invest in gold itself, know that you won’t earn any dividends or interest off of it; you merely count on its value at the time that you sell it. Read a full analysis of investing in gold, here.

Summary

Picking the right long-term investing strategy really boils down to your unique investor personality. Do you consider yourself market-savvy and can stomach a bit of risk? Or are you in it for the long-haul and don’t mind being patient with slower earnings in exchange for security? No matter what your preferences might be, there is no wrong answer. By committing yourself to the investment types that best suit you, you’re already getting yourself ahead financially to better secure your future.

What’s your favorite type of investment? Have you had any failures that you’ve learned from? Please share your tips and insights below!

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Real Estate Investing Strategies
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Real Estate Investing Strategies