Long-term investing is a general term describing a strategy of buying and holding investments for a period of over 10 years. Learn the best investment types and strategies for long-term investors.
What Is a Long-Term Investment?
A long-term investment is an asset suitable for an investor with a time horizon of more than 10 years. Because short-term price fluctuations aren't as threatening over longer periods of time, long-term investors are often willing to accept more risk in exchange for the potential to earn higher relative returns over time.
As an investor's financial goal approaches, they may choose to invest in assets that are lower in risk to achieve more stable returns. For example, a 40-year-old saving for retirement in their 60s may heavily weight their portfolio allocation toward stocks, but reduce stock exposure, and perhaps hold more bonds, when they are within 10 years of their retirement goal.
Benefits of Long-Term Investing
Long-term investing is a strategy that has multiple benefits, including cost savings, tax advantages, and compound interest.
The benefits of long-term investing are:
- Cost savings: Infrequent trading with a buy-and-hold investment strategy helps to reduce related fees and commissions.
- Saves time: Long-term investing does not require a great deal of research or trading, and some investors employ a set-it-and-forget-it approach, saving time.
- Tax advantages: Accounts used for long-term investing, such as individual retirement accounts (IRAs) and 401k plans grow tax-deferred, which allows for greater growth over time.
- Compound interest: Long-term investors can benefit from compound interest by reinvesting dividends and capital gains, which buy more shares of the investment, thereby creating exponential growth.
- Risk/return benefits: Investing slowly over time with a dollar-cost averaging approach helps to smooth out the ups and downs of short-term volatility.
Types of Long-Term Investments
The main types of long-term investments are stocks, bonds, mutual funds, ETFs, and real estate. Each investment type has a unique risk/reward profile that investors need to understand before investing.
1. Stocks
Stocks are equity securities that represent ownership in a company. Shares of stock give the investor or shareholder a claim on the company's earnings as well as certain rights such as voting on the future of the company.
Note: The average historical stock market return is about 10%; however, long-term investors should expect multiple market corrections of 5 to 10% per year, and at least one bear market, or a decline of 20% or more, every 5 to 7 years on average.
2. Bonds
Bonds are fixed-income securities that represent a loan from an investor to a company or government agency. Since bonds pay a fixed amount of interest quarterly or semi-annually, they may be used as income investments. Because bond prices are more stable than stocks (and often not perfectly correlated), bonds are used as diversification tools.
3. Mutual Funds
Mutual funds are managed portfolios that typically hold dozens or hundreds of securities, such as stocks, bonds, or a combination of assets. Therefore, mutual funds can make it easier for an investor to gain diversified exposure to a broad market segment, helping to reduce risk compared to investing in single securities.
Note: Mutual funds can be actively managed or passively managed. For example, an active approach involves an attempt to outperform an index, such as the , whereas a passive approach attempts to match the returns of an index, less fees.
4. Exchange-Traded Funds
Exchange-traded funds (ETFs) are investment securities that combine some of the attributes of stocks and mutual funds. Like stocks, ETFs trade intra-day on an exchange. Like passively-managed mutual funds, many ETFs seek to track the performance of a benchmark index.
5. Real Estate
Real estate investments include residential property, commercial property, and land. Some investors prefer real estate investment trusts (REITs), which are companies that own or operate real estate property to generate income for the owners, partners, or shareholders.
Tip: REITs enable investors to participate in passive real estate income without directly holding real estate property. The reason why REITs are generally considered income investments is that they are required to pay out 90% of the trust's taxable income as dividends to shareholders. REITs and REIT funds may also be used as diversification tools.
Long-Term Investing Strategies
Long-term investing strategies generally incorporate a buy-and-hold approach but may include a range of related strategies or styles, such as passive or active investing, as well as growth or value investing.
1. Buy & Hold
As the name implies, the buy-and-hold investing strategy involves buying investments and holding them for a long period of time, regardless of short-term market fluctuations. The most popular and generally the most recommended strategy for long-term investors, buy-and-hold typically seeks to achieve long-term growth of capital.
2. Passive Investing
Passive investing is a strategy that involves investing over the long term with very limited buying and selling. Passive investors may invest in a range of investment securities but often use index funds, which is a mutual fund or ETF that tracks the performance of an underlying benchmark index, such as the .
Note: Some passive investors choose to use a robo advisor, which provides automated investing services, such as portfolio allocation and rebalancing, based upon an investor's preferences.
3. Active Investing
Active investing involves taking a hands-on approach, which may include investment research, security analysis, and the timing of trades. Active portfolio management usually follows a planned objective to outperform a key benchmark, such as inflation or the S&P 500, or to obtain a targeted absolute return.
4. Growth Investing
Growth investing is a strategy that seeks capital appreciation and typically uses aggressive investment types, such as growth stocks, which are stocks that are anticipated to grow faster than the market average. Growth investing can be appropriate for investors who can tolerate significant short-term market fluctuations for the possibility of above-average long-term returns.
5. Value Investing
Value investing is a strategy that involves the use of fundamental analysis to find securities that are selling below their perceived intrinsic value. A value investor typically buys and holds value stocks generally, which often pay dividends and typically have lower relative P/E ratios than growth stocks.
6. Dividend Investing
Dividend investing is a strategy of buying stocks that pay dividends, using the power of compound returns to create income from investments on top of price appreciation. Long-term investors may choose to reinvest dividends, which will go to buy more shares of stock, enhancing the compounding effect.
7. Dollar Cost Averaging
Dollar-cost averaging (DCA) is an investment strategy whereby an investor makes multiple purchases of an investment over regular intervals. Therefore, because the investor realizes different pricing points of entry, a DCA strategy can reduce volatility and risk in a portfolio, because the investor makes purchases over regular intervals, as opposed to all at once.
Tip: Dollar-cost averaging can be achieved via the setup of an automated investment program, or manually through an investor's judgment of when to make follow-up investments.
Bottom Line
A long-term investment is a security or asset typically held for a long period of time, such as 10 years or more. Long-term investing strategies often incorporate a buy-and-hold approach and focus primarily on achieving favorable rates of return over the holding period, while generally ignoring short-term market fluctuations.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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