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.
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.
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.
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.
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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.
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.