Long-term investments build wealth by ensuring your money grows over time. In addition, long term investments overcome global market challenges, hence securing your principal. High risks equate to higher returns, as in the current economy, investments deemed as safe often lose value to inflation. Growth is associated with risks and long term investments overcome the risks.
What are long term investments?
Long term investments are assets that are held for more than one year and used to create other income streams, besides the normal income of an individual or a company. Long term investment is all about wealth creation. This involves building an investment portfolio that will generate income for the rest of one’s life. Long-term investments are known for capital appreciation that is gained by taking certain risks for higher rewards.
Below is an overview of the best long term investments to capitalize that will ensure you get the best returns.
Stocks
Stocks are considered one of the core long term investments due to the high returns the offer. The annual return on stocks is considered to be 10% annually. The COVID-19 pandemic has brought the world to its knees, plunging the financial markets and reiterating the need to focus on long term investments for the future. Keeping in mind that stocks have high market adaptability and have survived through wars, recessions, pandemics, and many more, then every investor should have a fraction of their portfolio invested in stocks.
Two types of stocks that you may be interested in investing in are growth stocks and high dividend stocks.
- Growth stocks offer long term financial growth since the money is re-invested as opposed to getting paid out dividends. Growth stocks offer high returns over time. Amazon is a perfect example of growth stocks. In 1994, Amazon stock could be purchased as low as $20.Over the years, it has risen to trading at $170 per share. Had you invested $100,000 in 1994, you could have $750,000 now.
- High dividend stocks have the prospect of appreciation and are considered one of the best long term investment options. Dividends paid out to stakeholders make these stocks less volatile in the case of a downturn in the markets. As much as there are numerous success stories associated with stock markets, there is often a lot of volatility. In addition, some stocks just don’t go anywhere. When thinking of long term investment in individual stocks, you should consider using a large, low-cost investment broker who offers you proper advice on investment options and has low to no trading fees.
Real estate
Real estate is the most common alternative for long term investment to stocks. The most fundamental way of investing in real estate is by owning a home. The most common ways to invest in real estate are either through rental income or capital appreciation. After the global pandemic, it will be difficult to make positive cash flows at the very beginning. However, as time goes by, the rent prices increase, and you will start making profit and having a sustainable monthly income. To make matters better, once the mortgage is paid off, the return on investment will increase. The greatest advice for all seeking to invest in real estate is that it requires utmost patience, just like any other investment in the beginning. Therefore, aim to make break evens at first before expecting positive cash flows. For those that do not want to take the chance of owning rental real estate but still wish to invest in real estate, then the Real Estate Investments Trusts (REITs) is for you. REITs work like high stock dividends since you buy into the trust, participate in ownership, and receive profits on the property. Properties purchased through REITs are often commercial in nature. The return on investment often comes from equity ownership. The capital required is not intensive hence a major advantage.
Bonds
Bonds are a lucrative long term investment option because of the interest rates they attract. Bond prices are inversely proportional to interest rates. That is, when the interest rates decline, the prices of bonds appreciate. When the government or a company issues a bond, it agrees to pay the owner a certain interest annually. The returns on bonds are typically lower compared to stocks. However, they are considered a safer option. In times of distress, such as now where a major pandemic has wrecked the global populations, bonds would offer capital appreciation and interest income. Bonds are considered relatively safe, especially federal bonds, as they are more stable.
Mutual Funds
Mutual funds function as large portfolios of stocks and bonds. For people who are not vastly knowledgeable in investments, mutual funds are the most preferred. This is because you can direct a part of your investor capital into one or more funds that will be invested for you.
Mutual funds are actively managed and their main aim is to outperform the underlying market index. Fund managers assess stocks that are doing well or look promising and invest in them. Mutual funds are a great long term investment for revenue or earnings growth.
Exchange Traded Funds(EFTs)
They are similar to mutual funds. However, they are passively managed. EFTs invest in underlying market indices. In addition, they also invest in small-cap stock markets. With EFTs, you can also invest in other specialized markets such as tech and real-estate when you choose a fund with specialization. This makes it easier to invest in funds based on your preferences and industry.
Robo-advisors
Robo-advisors are a great alternative for anyone starting out or those who prefer to outsource investment services. Robo-advisors have come up from less than a decade ago and attracted investors at all levels of experience. It is as simple as filling out a questionnaire and the Robo-advisor will build you an investment portfolio based on your risk tolerance, goals, and duration.
The charges for Robo-advisor investment charges are 0.25% annually, plus the costs of funds in the account. With a Robo-advisor, you set the investment pace yourself based on your preferences. If you want to go with stocks or choose a basic savings account, then you choose.
It is a good long term investment to consider because its rewards can be high, more so for stock investors. However, safer investment options still gain returns gradually, such as holding cash in your savings account.
Individual Retirement Account(IRA)
This is one of the best long term investment plans for risk-averse people as chances of loss are next to nil. The benefit of an IRA CD is that it is tax-friendly, hence the interest your investment accrues will be tax-free. It is considered one of the safest long term investments as you are assured of receiving your payouts. The risk is that you have to ensure that you are investing enough to beat inflation.
Small-cap stocks
Small-cap stocks refer to stocks of a relatively smaller company. Amazon, one of the largest e-commerce companies, started off as a small-cap stock. Those who invested then are reeking in money currently. Small companies tend to have more capability to expand into emerging markets and grow quickly. Investors often pay attention and put a lot of money into small-cap stocks of an individual company with the potential to grow with time. This investment needs time and effort to thoroughly analyze different company potentials. The risk of small-cap stocks is that they are highly volatile due to less financial resources and access to capital markets. The return on your investment for finding a good company will be immense.
Land
Land is typically a long term asset and investment for an individual or company. Land is considered e a passive long term investment as it appreciates over time. For example, an investor with 50 acres of land will choose to use 20 acres of land to build property and sell off the remaining pieces at a profit.
Annuities
Annuities are contracts between an individual and an insurance company that requires the insurance company to pay you a certain amount after the maturity period. Fixed indexed annuities are a go-to for risk-averse investors as the price can only go up and never down. For retirees, fixed annuities are the best long term investments as they work similarly to IRA, where a fixed rate of interest is guaranteed and is tax free.
Tips for Long term investment strategies
- Ensure stocks are a major pillar of your investment strategy.
- Ensure asset diversification.
- Separate emotions from investment objectives.
- Put investments and personal cash reserves in separate places.
Bottom Line
A long term investment built over time is one of the best ways to build wealth. Long-term investments cushion you from uncertainties such as the COVID-19 pandemic. It is important to re-think your investment goals and set up plans towards active and passive investment opportunities.
Let money work for you!