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6 Best Assets for Long-Term Investment Strategies

L ong-term investment strategies must account for your financial goals, risk tolerance, and desired level of involvement in portfolio management. When developing a strategy to inform your market decisions, experts recommend building a selection of diverse assets and holding them for at least seven to 10 years in order to optimize potential profit and minimize risk. Review the six best assets to incorporate in your long-term investment plan.

Why Develop a Long-Term Investment Strategy

Even if you don’t have a hefty chunk of disposable income to invest in the stock market, contributing small but regular amounts of money to investments over time can still build wealth and help you fund your financial future. These six long-term investment choices provide healthy returns with a buy-and-hold strategy and don’t necessarily require the time investment associated with active portfolio management:

  • Exchange-traded funds and mutual funds: These assets are comprised of a diverse range of stocks, bonds, and other securities designed to mirror the performance of a specific sector or index, such as tech stocks or the Standard and Poor 500.
  • Growth stocks: These companies are projected to have a serious upward trajectory, so they offer a good opportunity for long-term investors to buy low and sell high.
  • High-dividend stocks: These tried-and-true blue-chip investments pay about 3% a year in shareholder dividends in addition to the expected annual interest return.
  • Long-term bonds: These government, municipal, or corporate securities have terms of at least 10 years and provide the most profits when held to maturity.
  • Real estate: While real estate investment has inherent risks, it’s among the most popular long-term choices for investors.
  • IRA CD: This investment uses the funds in your individual retirement account to purchase a certificate of deposit.

Exchange-Traded Funds and Mutual Funds

These investments are actually collections of various stocks and bonds that reflect a market index or the selections of a professional investment manager. Exchange-traded funds (ETFs) and mutual funds provide the benefits of diversification as well as a plug-and-play approach for new investors who don’t have the time or inclination for research and analysis. Over many years, mutual funds and ETFs show historically better performance than stocks and bonds do.

Many investors choose funds that track a major market index, such as the Standard and Poor 500, which includes a collection of shares from the 500 companies with the largest market capitalization. Others invest in funds that focus on a specific industry, such as pharma, health care, real estate, energy, agriculture, or tech. You can also purchase funds that contain stocks from a designated region or nation.

Mutual funds are actively managed funds, which means the investors strive to do better than the market index the fund reflects. Investors can realize gains of up to 30% in a single year. However, less than 25% of these funds actually outperform the underlying asset at the five-year mark.

A professional investor may have a mutual fund with their best picks from the S&P 500 rather than tracking the entire index. Funds can also focus on high-value stocks or those that produce substantial earnings growth or revenue.

ETFs are the passively managed version of mutual funds, which means they seek to match rather than exceed the performance of an industry or index. As with mutual funds, you can invest in large-cap ETFs that track the S&P 500 as well as small-cap and mid-cap ETFs that track indexes for those stocks. The ETF will directly reflect the proportion and makeup of the underlying index.

These investments offer lower costs than mutual funds, with no load fees and a broker commission of about $5 to $10 per trade at many brokerage firms. The investment threshold for ETFs is much lower than with mutual funds, which often require a minimum starting purchase of $3,000 or higher.

Growth Stocks

Many experts list growth stocks as a winning bet for long-term investors in 2020, thanks to their expected high growth and high profits. These investments are typically tech stocks and other assets poised for a dramatic rise in the coming months.

Growth stocks are well-regarded, but they aren’t for everyone because of their higher risk level relative to other long-term investments. In addition, investors seeking dividends should steer away from growth stocks. However, while these stocks can plunge quickly in a down market, they historically offer some of the best returns when held for at least three to five years.

Buying growth stocks involves a careful analysis of the target company, its background, and its financials. Potential growth investors must have the time to devote to due diligence.

High-Dividend Stocks

Many traders consider high-dividend stocks to be the flip side of growth investments. While growth stocks funnel profits back into the expanding enterprise, high-dividend firms issue healthy dividends to their shareholders. Usually, these firms are blue-chip companies that have been around for a long time and produce reliable profits with steady, if slow, growth year after year.

These stocks often pay dividends of 3% or more a year, exceeding the average yields of fixed-income investments. For example, General Electric has a dividend of 3.61%, Verizon pays a 4.92% annual dividend, and AT&T offers a 5.57% dividend to shareholders each year. In addition to dividends, these investments also have the potential to produce as much as 10% annual interest on your capital holdings.

Not only do high-dividend companies offer some of the best returns, but they also carry low risk because of their low volatility level (particularly compared to growth investments). However, dividends may decrease or even become eliminated if the company’s stock value falls.

If you want to explore high-dividend stocks, work with a low-cost investment broker that offers education and resources along with low transaction fees.

Long-Term Bonds

Governments, corporations, and municipalities issue bonds to raise capital. The long-term versions of these securities have terms of at least 10 years and typically 20 or 30 years. Investing in long-term bonds typically produces greater returns than with their short-term counterparts. For example, a 30-year U.S. Treasury Bond currently has a return of 3.03%, compared to 2.61% on a five-year U.S. Treasury Note.

Bonds carry limited risk, but one potential pitfall of long-term bonds is the potential for rising interest rates. If that occurs, you will continue to receive the lower rate at which you bought your bond until it expires, no matter how much longer you have left on the contract. In addition, bond prices tend to decline as interest rates rise, which means you have to hold it until expiration unless you plan to sell it below the face value.

Real Estate

Image via Flickr by highmarke

Bankrate listed real estate as the most popular long-term investment in the United States in 2019. While purchasing property can create significant returns after at least a decade, investors must cope with high start-up costs and commissions.

On the flip side, real estate is a unique investment in that you can borrow money to invest at a low interest rate and pay it back over time. As long as you can qualify for a mortgage at a desirable rate, your investment will likely outpace the associated costs. You can also take advantage of favorable tax treatment, with countless credits and deductions available at the local, state, and federal levels.

If you hire a property management firm, real estate investment can be a fairly passive activity. However, renting out a commercial or residential property yourself requires a lot of legwork — although it does allow you to become your own boss.

The main risk of investing in real estate occurs if property values plummet or rental demand decreases in your area. You must continue to pay the mortgage and other costs for the property even if you don’t have a tenant or the loan goes underwater.

IRA CD

With this type of investment, you use your individual retirement account (IRA) to buy a certificate of deposit (CD). This long-term investment provides tax advantages while offering a guaranteed return with limited risk. In fact, the FDIC will guarantee your IRA investments up to $250,000, so you have little chance of loss with this type of investment. However, keep in mind that a CD doesn’t always earn enough money to outpace inflation over time. Even when it doesn’t, however, it still provides an outstanding hedge for the riskier investments in your portfolio.

L ong-term investment strategies often focus on a combination of these investments. When planning for your own financial future, it pays to explore the benefits of holding on to stocks and other assets for years, if not decades.

 

Author:Jeff Bishop

One of the best traders anywhere, over the past 20 years Jeff’s made multi-millions trading stocks, ETFs, and options. He is renowned as an incredible trader with a deep insight and a sensitive pulse on the markets and the economy. Jeff Bishop is CEO and Co-Founder of RagingBull.com.

Even greater than his prowess as a trader is his skill and passion in teaching others how to trade and rake in profits while managing risk.

10 Common Types of Traders

No matter how new you are to investing, you probably already know that everyone has a distinctive trading style. However, most investors build their unique strategy by selecting their favorite techniques from an array of common trading toolboxes. Review the common types of traders to see where you fall and hopefully glean some new tips about how to navigate the market.

What Type of Trader Are You?

Your trading strategy depends on your personality, financial goals, and risk tolerance, as well as the amount of time you can devote to actively investing each day.

Begin forming a distinct trading methodology of your own by exploring ten common types of traders and their strategies, risks, and rewards:

  • Arbitrage trader: An investor who simultaneously buys and sells shares of the same financial asset from two exchanges at two different prices.
  • Buy-and-hold trader: An investor who takes advantage of long-term growth by holding stocks for months or years.
  • Day trader: An investor who buys and sells shares in the same day to benefit from price volatility.
  • Fundamental trader: An investor who makes trading decisions based on background research about the company, including financial reports.
  • Market timer: An investor who uses both fundamental and technical analysis to predict market changes and drive short-term trading decisions.
  • Noise trader: A short-term investor who uses technical analysis only and trades based on chart patterns and data trends.
  • Position trader: A less active type of trader who uses charts for monthly rather than daily or weekly analysis.
  • Scalpers: Traders who make hundreds of high-volume trades to take advantages of price fluctuations that occur in hours or even minutes.
  • Sentiment traders: These traders look for trend indicators and then trade in the same direction as the market.
  • Swing traders: These short-term traders try to benefit from price changes at the end of a breaking trend.

Arbitrage Trader

These investors buy and sell assets at the same time to take advantage of discrepancies in price. Inefficiencies in the market allow individuals to hedge their bets by using this strategy to play two different markets against each other with similar financial assets. For example, they can buy a stock that trades on more than one exchange at different prices. They will purchase it low on one market and sell it high on the other.

The incorrect market pricing that fuels arbitrage trading has become rare with technological advancements. Errors like these are usually detected and corrected quickly.

Buy-and-Hold Trader

These traders are also called long-term traders because they buy assets at a low price and hold them for years to take advantage of the market’s historic price rises over time.

If you contribute to an individual retirement account or a 401(k) plan through your employer, you already participate in long-term trading.

This strategy is popular among beginners because it carries the lowest level of risk and requires the least amount of active trading activity and analysis (or none, if you decide to use an automatic online advising platform).

Day Trader

This is one of the most common active trading styles and, as the name suggests, describes the practice of buying a financial asset and reselling it before the market closes the same day. Day traders are usually professional investors, although more new traders have been taking advantage of this strategy with modern online trading platforms. Closing before the end of the day prevents loss in case the stock price drops before the market opens (a situation called gapping down).

Fundamental Trader

The fundamental trader reviews a target company’s background, history, and current financials (called its fundamentals) to drive and time stock trades. While some fundamental traders do focus on short-term trades, most rely on the tried-and-true long-term buy-and-hold strategy. If you love research, facts, and logic, fundamental trading may be a good fit for you, provided you have the time to dedicate to due diligence. The downside of this strategy is that the markets don’t always behave in accordance with logical expectations.

Market Timer

Image via Flickr by oatsy40

Market timing traders try to predict and profit from the fluctuations of the market, either using economic data, technical indicators, or a combination of both. Opinions differ about how successful this approach can be, but significant profits are available for those who get good at guessing and don’t mind the risk. Generally, market timing is a short-term investment activity.

For best results, you’ll need to devote lots of time to analyzing the market so you can plan and execute trades. The most advantageous market timing happens during an unprecedented bull market, such as the recent real estate and tech booms.

Noise Trader

Unlike fundamental traders, noise traders completely ignore a company’s fundamentals when making trading decisions. Instead, they look solely at financial trends in an attempt to profit off of short-term trades. Noise traders rely on technical analysis, which involves reviewing the historical charts of a stock or market to look for trading volume, price history, and other indicators of future behavior. Most traders use at least some form of technical analysis when making market moves. However, learning technical analysis charts and patterns and constantly checking for potential up or down indicators can be time consuming.

Position Traders

Another active strategy, position trading involves the analysis of daily to monthly charts to find trends in the market. Based on the current movement, the position trader will hold an asset for anywhere from a few days to a few weeks. With this longer time frame, position trading requires much less active monitoring than day trading or swing trading does.

Using the charts, these investors look for trend indicators such as lower highs and higher highs. They aim to go with the flow of the market to benefit from volatility. Once they spot a trend, they jump in quickly, then get out just after it breaks. This can be difficult in quick-changing markets.

Scalpers

This type of trader holds securities for just minutes before flipping them to profit from small price moves throughout the day. Although profits may be small for each trade, scalpers conduct a high volume of trades each day in order to come out ahead — sometimes dozens, sometimes hundreds of these so-called micro-transactions.

Usually, these investors aim to condense their activity in the business parts of the trading day to take advantage of increased volatility and volume. Scalping works best in a liquid market and requires the trader to find tight spreads that will optimize potential profits. Often, scalpers use this strategy to trade currency pairs. They must be comfortable with the stress of a high-pressure technique requiring split-second trading decisions and have the ability and time to conduct necessary research and analysis.

Sentiment Trader

While noise traders use technical analysis to profit by trading against market trends, sentiment traders let these indicators guide them in the same direction as the market. These investors go with the flow and implement both fundamental and technical analysis in trading decisions. Some of the main challenges facing sentiment traders include the difficulty of accurately predicting market movements, price change volatility, and the fees and commissions associated with frequent trades.

Swing Trader

The swing trader attempts to benefit from the price volatility that often occurs at the end of a breaking trend. They develop their own trading strategy based on a combination of fundamental and technical analysis to decide when to sell or buy an asset. Usually, this personal algorithm strives to find the peak or nadir of shifting prices. They tend to hold positions longer than day traders do, usually for a few days, but sometimes for several weeks.

Swing trading works best in a market that’s ‘sideways,’ or limited within a specific range. Some of the most important technical analysis tools for this type of trader include the stochastic oscillator, the relative strength index, and the moving average convergence divergence. Many swing traders specialize in one industry or type of financial asset so they become intimately familiar with its price movements.

Which of these types of traders appeals to you most? If you’re new to the market, consider starting your strategy there and adapting it over time to fit your needs as you learn more about trading and develop your instincts.

Author:Jeff Bishop

One of the best traders anywhere, over the past 20 years Jeff’s made multi-millions trading stocks, ETFs, and options. He is renowned as an incredible trader with a deep insight and a sensitive pulse on the markets and the economy. Jeff Bishop is CEO and Co-Founder of RagingBull.com.

Even greater than his prowess as a trader is his skill and passion in teaching others how to trade and rake in profits while managing risk.

How to Invest: A Beginner Guide to Investing

T he world of investing may seem overwhelming when you’re first starting out. However, even if you’re getting started on a small budget, you’ll find opportunities for investment out there. The trick is figuring out the best strategies and investments for your specific goals. This beginner guide to investing will explore the steps you should take to set yourself up for success.

Key Takeaways:

  • You can start investing on any budget, even if you’re totally new to the realm of investments.
  • A few key steps will help you figure out the right way to dive into the investing world.

Understand the Type of Investor You Are

Image via Unsplash by markusspiske

Before you dive in, you’ll want to take a moment to understand what type of investor you are. Investors usually fall into a few main categories:

DIY Investors

The do-it-yourself-ers of the investing world, DIY investors take a hands-on approach to their investments. If you consider yourself a DIY investor, you’ll have to commit to doing all of your own research. You’ll also need to regularly keep track of your stocks, which can be very time-consuming.

The big benefit of DIY investing? You keep total control over what you have in your investment portfolio.

If you want to invest in this way, you’ll typically get started by finding a stockbroker and opening a brokerage account. Then, you’re ready to start buying and selling stocks and/or investing in index funds on your own.

Passive Investors

Other investors are much more passive in their approach. If you don’t have time to invest in investing, or you’re just not interested in doing all that research yourself, you have various options to hire a professional who will do that work for you.

You can even invest in exchange-traded funds or mutual funds using a robo-adviser. These advisers are ideal for investors who don’t want to get involved with the process of investing. You just get the platform, answer a few questions about your investing goals and the risk you’re willing to take on, and let the robo-adviser do the rest on your behalf.

However, with any type of passive investment strategy, you’ll have to accept that you don’t control investment decisions made for you. There also may be limits to the types of investments you can make.

Investors Who Work With Stock Advisers

If you think you fall somewhere in the middle of the above two investor types, you might choose to work with a stock adviser. This allows you to use a mix of DIY investing and passive investing.

You’ll either hire a stock adviser or sign up for a stock-picking service. This way, you can pick the stock you want for yourself but still get some insight from experts. If you go this route, you will still need to open a broker account, but you can let someone else deal with the time-consuming aspects of investing.

Understand Your Investment Options

As a new investor, you’ll have plenty of options to get started. You can invest in an employer-sponsored retirement plan like a 401(k), go with a traditional IRA or Roth IRA, or open a standard investment account. No matter which option (or combination of options) you choose, you’ll also need to pick what you’re investing in. You should understand how each instrument works, and the risk it poses, when you make your choice.

Popular investments for beginner investors include:

Stocks

Also known as equities, stocks are shares of ownership in a company. You purchase stocks for a share price; this can range from just a dollar or so to a few thousand dollars. The stock price depends on the company you choose to invest in.

Bonds

A bond is basically a loan you make to a company or a government entity. That company or entity agrees to pay you back in a set amount of years, and you get interest in the meantime. In general, bonds pose a lower risk than stocks as you know exactly when you’ll get your money back as well as how much you’re set to earn. However, bonds earn lower returns than stock over the long term.

Mutual Funds

Mutual funds are mixes of investments that are packaged together. Instead of deciding on individual stocks and bonds, you’ll buy a diverse collection with one transaction. Mutual funds are inherently diversified, so they’re typically less risky than buying individual stocks. Many 401(k) plans offer curated selections of index or mutual funds with no minimum investment. However, if you’re investing outside of those plans, you may need at least $1,000 or more to get started.

You can get mutual funds managed by professionals or choose index funds that follow a specific stock market index’s performance (such as the S&P 500). Index funds usually charge lower fees than mutual funds that are actively managed.

Exchange-Traded Funds

ETFs are similar to mutual funds in that they hold many individual investments together in a bundle. Unlike mutual funds, however, ETFs trade throughout the day, just like stock. You also purchase an ETF for a share price. Because the share price of many ETFs is often lower than the minimum investment you’ll need to make in a mutual fund, ETFs may offer good options if you’re just starting out or you have a smaller budget.

Decide How Much to Invest

Once you decide how active or passive you’ll be when making investments and consider your different investment options, carefully think about how much money you want to invest. This answer depends on both the funds you have available to devote to investing right now as well as how much you should be investing. The latter will depend on your goal for investing — and when you need to reach that goal.

Setting an Investment Goal

The goal you set will play a big role in determining your budget.

Retirement is one common goal for investing. One general rule is to try to invest about 10% to 15% of your income every year toward retirement (any employer match will count toward that goal as well). If that sounds unrealistic right now, you can still get started investing now and work your way to that goal over time. When it comes to retirement savings, it’s better to start off small than to put off investing completely.

You may have a retirement account from your job, such as a 401(k), that offers matching funds, which will make setting your first goal easy. You’ll want to make sure you contribute at least the minimum amount that allows you to earn the full match from your job. After all, that’s free money.

Other investing goals besides retirement call for you to think about your time horizon along with the amount you need to achieve that goal. From there, you can work back to figure out how much you should put into weekly or monthly investments.

Setting a Budget

No matter your end goal, you’ll need to determine a budget when you start investing. You’ll want to look at two aspects together:

  1. The minimum amount of money you need to get started: There’s technically no real minimum to start investing in stocks. Individual stock prices depend on how expensive shares in a company are, and share prices range from a few dollars into the thousands. If you want to go with mutual funds, you can do that on a limited budget as well. Though mutual funds themselves typically have minimums of $1,000 or above, you can start with ETFs that you buy for a share price and trade like stock. ETF share prices can be under $100.
  2. The maximum amount of money you should devote to investments: This depends on how much you can afford to lose should your investments not go as planned and the type of investment you choose. You might allocate a relatively large part of your portfolio to stock funds, particularly if you have a longer time horizon. You generally want to keep a smaller portion of a portfolio dedicated to individual stocks.

Choose Your Investment Strategy

Determine your investment strategy depending on:

  • The saving goals you set.
  • The amount of money you need to get to those goals.
  • Your time horizon.

Long-Term Investments

You can opt to put most of your investing funds into stocks if your goal is over 20 years in the future, such as saving for retirement. You can either devote the time to researching and choosing specific stocks or go with ETFs, index funds, or low-cost stock mutual funds.

Short-Term Investments

Because stocks come with bigger risks, you may be better off making sure your money stays safe by turning to a cash management account, savings account, or low-risk investment portfolio. This is especially true if you are trying to save for a short-term goal and you need those funds in the next five or so years.

Once you make these first key decisions, you’re ready to get started investing. Since I’m not a stockbroker or adviser, it’s helpful to get out there and do as much research as possible before getting started.

Author:Jeff Bishop

One of the best traders anywhere, over the past 20 years Jeff’s made multi-millions trading stocks, ETFs, and options. He is renowned as an incredible trader with a deep insight and a sensitive pulse on the markets and the economy. Jeff Bishop is CEO and Co-Founder of RagingBull.com.

Even greater than his prowess as a trader is his skill and passion in teaching others how to trade and rake in profits while managing risk.