Finding the best long term investments is ideal for investors who can afford to be patient for more extended periods of time and are willing to accept a certain degree of risk in exchange for potentially higher rewards. These investors typically have enough available capital and can afford for their money to be tied up for a longer period of time without having to access it. It’s important that investors first understand what long-term investments are.
What Are Long-Term Investments?
Long-term investments are found on the asset side of a corporation’s balance sheet and represent its investments, including cash, real estate, bonds, and stocks. These are assets the corporation is intending to hold on to long-term, typically longer than a single year. These accounts are different than short-term investment accounts that will likely be sold in that they won’t be sold for years, if ever.
Best Long-Term Investments
- Certificates of deposit (CDs)
- Money market accounts
- Treasury securities
- Government bond funds
- Municipal bond funds
- Short-term corporate bond funds
- Dividend-paying stocks
- High-yield savings account
- Growth stocks
- Growth stock funds
1. Certificates of Deposit
Banks issue CDs, or certificates of deposit, which typically offer higher interest rates than traditional savings accounts. They are federally insured and have set maturity dates ranging from several weeks to years. Due to being “time deposits,” investors can’t withdraw the money during this time without penalty.
With CDs, financial institutions pay investors interest on a regular basis. Once the CD matures, investors receive their initial investment in addition to accrued interest. Due to higher payouts and level of safety, CDs can be an excellent option for retirees who don’t need immediate income and are able to have their money tied up for a bit. As of January 2020, investors can earn up to 2.25% on this type of long-term investment.
2. Money Market Accounts
Money market accounts are interest-bearing, FDIC insured deposit accounts. They usually require higher minimum balances and earn higher interest than traditional savings accounts. Because they earn higher yields and are relatively liquid, money market accounts are an ideal option for investors’ emergency savings.
In exchange for the higher interest-earning potential, investors typically have to accept additional withdrawal restrictions, including how often they can access their money and account limits. Money market accounts make a great option for new investors attempting to increase their cash flow and establish an emergency fund.
3. Treasury Securities
The U.S. government issues several kinds of securities to raise capital to pay its debts and for upcoming projects. Three of the safest treasury securities for traders to invest in to guard against loss of their initial investment include:
- Treasury bills: Also known as T-bills, this security isn’t technically interest-bearing and has a maturity date of one year or less. T-bills are sold at discounted rates from face value with the government paying full face value at maturity.
- Treasury notes: Also known as T-notes, these can be issued in two, three, five, seven, and 10-year terms. Every six months, investors earn fixed interest, and upon maturity, they receive the face value of the note. The T-note price can be less than, equal to, or greater than the note’s face value depending on the demand. When investor demand is high, notes will trade at a premium level, reducing investor return.
- Treasury bonds: Also known as T-bonds, these come with a 30-year maturity date. Investors receive interest payments every six months and receive the face value of the bond upon its maturity. Throughout the year, T-bonds are sold at auction with yield and price determined at that time. All three kinds of treasury securities are available in $100 increments and are a good option for more experienced investors hoping to minimize their risk.
4. Government Bond Funds
Issued by the U.S. government and its agencies, a government bond fund is a mutual fund that invests in debt securities. Examples of debt instruments these funds invest in include mortgage-backed securities that are issued by government-sponsored corporations such as Freddie Mac and Fannie Mae, T-bonds, T-notes, and T-bills. Government bond funds are well-suited for investors preferring lower risk and are an excellent choice for new investors and those seeking cash flow.
5. Municipal Bond Funds
Municipal bond funds invest in several kinds of municipal bonds that are issued by local and state governments. Earned interest is typically free of federal income taxes and can also be exempt from local and state taxes. The Financial Industry Regulatory Authority (FINRA) states that municipal bonds can be purchased through an exchange-traded fund (ETF), a mutual fund, or individually.
This type of long term investment is ideal for new investors looking for cash flow as it provides diversified exposure without the need to analyze individual bonds. Many investors look for municipal bond funds within their locality or state to take advantage of the additional tax advantages.
6. Short-Term Corporate Bond Funds
Buying shares of short-term corporate bond funds are a great way for small investors to gain exposure. Corporations sometimes issue short-term bonds as a way to raise money. The one-to-five year average maturity of these bonds makes them less susceptible to fluctuations of interest rate than intermediate or long-term bonds. Short-term corporate bond funds may be an excellent option for retirees or investors looking to establish cash flow or reduce their overall portfolio risk while still earning a return.
7. Dividend-Paying Stocks
Stock market investments can even become safer when investing in dividend-paying stocks. Dividends are part of a corporation’s profit that it pays out to investors, typically each quarter. Dividend-paying stocks allow investors to earn money from their investment via long-term market appreciation while still being able to earn cash in the short term. Purchasing individual stocks, regardless of whether they pay dividends or not, is a better option for investors with intermediate and advanced skill levels.
8. High-Yield Savings Account
Savings accounts are excellent vehicles for investors who want to have easy access to their cash. Similar to a traditional savings account earning interest with a brick-and-mortar financial institution, a high-yield online savings account is an accessible monetary vehicle many investors use. With fewer overhead costs, investors can receive higher interest rates with online financial institutions, with some paying more than 2% as of January 2020.
9. Growth Stocks
Growth stocks are a segment of the stock market that have performed very well over time. They are made up of tech companies such as Apple, Amazon, and Alphabet (Google) that are rapidly growing sales and profits. Unlike their dividend stock counterparts, growth stocks prefer to reinvest in their companies to increase growth instead of making cash distributions.
Growth stocks are some of the most popular types of stocks for good reason. Top growth stocks can return more than 20% for many years, but investors need to analyze them and attempt to figure out which ones are poised to do so. Like dividend-paying stocks, growth stocks are best suited for investors having intermediate to advanced skill levels due to their volatility and the need for investors to carefully analyze them before purchasing.
10. Growth Stock Funds
For investors not wanting to deal with the hassle of selecting and analyzing individual growth stocks, investing in a growth stock fund is a viable option. Investors can choose a fund that’s actively managed by professional fund managers who select growth stocks they believe will beat the market or passively managed funds based on a pre-determined index of growth stocks.
Regardless of which they choose, growth stock funds give investors the ability to access a diversified group of growth sets and reduce the risk of a single stock performing poorly and damaging their portfolio. This results in the performance of all stocks in the fund being averaged, which over time is typically good. Growth stocks are ideal options for all levels of investors looking for a broadly diversified investment portfolio.
Investors can sign up for a free training session with one of Raging Bull’s team of experts for help determining which of these best long term investments is the right fit for their financial situation and investment strategy and goals.