Do you have a goal set for your financial future? Frequently, that goal is retirement, which means not only leaving your job but also staying retired for as long as four decades. Since you don’t want to scrimp and save during your golden years, it’s crucial to strategically select the right long-term investments for your unique situation.
What to invest in now for the long term
When investing for the long term, you’ll want to consider various liquid, investable asset classes, such as:
Stocks: Stocks are known for their growth potential but can be volatile in the short term. For the long haul, it’s important to get the growth that stocks bring.
Bonds: Bonds are debt securities issued by corporations, governments or municipalities. Investing in bonds is like lending money to an issuer in exchange for regular interest payments and then getting back your principal at maturity. Bonds are generally considered lower risk and typically don’t return as much as stocks over time.
Real estate: Sure, you can own physical real estate, including your primary residence. But in your investment portfolio, you can own real estate investment trusts, or REITs. These investments hold diverse real estate asset categories, such as commercial, residential, industrial and more. REITs trade on the major exchanges and can help diversify the equity portion of your portfolio. Doesn’t that sound better than getting a 3 a.m. phone call because your rental property is flooded?
Commodities: Commodities are physical goods like gold, oil and agricultural products. Investing in commodities can provide portfolio diversification, as these investments offer returns frequently uncorrelated with traditional stocks and bonds. Commodities may also provide a hedge against inflation, although their prices can be volatile.
Long-term investing with growth stocks
Growth stocks as an asset class offer the potential for higher returns compared to value or dividend-paying stocks, as their earnings tend to rise rapidly. These stocks often hail from the technology sector as well as consumer discretionary, health care and communications services.
In exchange for higher returns, growth investors should be prepared to take on more risk. Growth stocks are more sensitive than value stocks to changes in the economic and interest rate environment. As interest rates increased in 2022, for instance, quintessential growth sectors like information technology, consumer discretionary and communication services fell out of favor and were among the worst performers.
Growth stocks often have low correlations with value stocks or other asset classes, which can help balance your return, while also reducing overall portfolio risk. But in order to mitigate the risk that comes with growth stocks, diversification with other stock sectors, in addition to bonds and other alternatives, is crucial.
Bonds for long-term investing
Bonds are a key component of a well-constructed, long-term portfolio. They dampen the volatility of stocks and generate income, which can help offset downturns in the stock market over the long term.
You might have heard that bonds are good for risk-averse investors, and most investors should hold some bonds as a way of mitigating risk, even though they won’t generate the kind of return most people need for retirement.
Keep in mind that not all bonds are the same. Bonds are loans made by investors to governments or corporations, and they come in various types, each with their own pros and cons.
Whereas corporate bonds are issued by companies to raise money for operations or expansion, government bonds are issued by governments to finance public spending projects. While government bonds are generally very low-risk investments, they typically offer lower returns than riskier corporate bonds.
Long-term dividend stocks
Dividend stocks have long been considered a key part of a long-term investment portfolio. The income they produce can help offset stock price declines. Dividend-payers are among the best long-term stocks.
That consistent income stream is especially valuable for retirees or anyone else who’s seeking passive income. It makes a lot of sense: If you’re retired and withdrawing money to cover living expenses, you’d prefer to use the dividends, rather than cashing out your stock holdings.
Dividend-paying companies are generally more established and financially stable. More than three-quarters of stocks in the Standard & Poor’s 500 index pay a dividend, as do most of the 30 stocks in the Dow Jones Industrial Average.
Reinvesting dividends can also juice up your returns due to compounding. When dividends are reinvested, they’re used to purchase more shares of the stock, leading to growth over time.
Investors should consider the quality and sustainability of their dividend payments when buying long-term stocks. For example, a high dividend yield sounds great, but a stock’s yield may only be high because it’s paying an unsustainable dividend as its stock price sinks. Investors should understand a company’s financial health and dividend history before investing.
Value stocks are those that are undervalued by the market, usually trading at low price-to-earnings ratios or low prices relative to their intrinsic value.
Investors can gain some level of diversification by Including value stocks alongside growth, bonds and other asset classes. Value stocks may come into favor when growth stocks are shunned, which should help balance out the performance of an investment portfolio.
Value stocks also have historically provided competitive returns over longer time horizons. In fact, in certain market environments, value stocks often outperform growth stocks.
Additionally, value stocks often pay dividends and may increase their payouts over time. These dividends not only provide a stream of retirement income but also benefit from the effects of compounding if they are reinvested.
Long-term investing with real estate
Many investors like investing in real estate for the long term, in addition to liquid investments. But before committing a big chunk of money to brick-and-mortar investments outside of your primary residence, investors should be familiar with the pros and cons.
Pros include stability and appreciation, as property values typically increase over time. Cash flow is another big advantage, as real estate allows investors to generate income from rental properties. And as with other types of investments, diversification should be a top priority. The real estate portion of your portfolio will likely perform differently from the rest of your investments, which mitigates risk.
On the downside, real estate is not nearly as liquid as a stock or bond investment. If you need to raise some cash quickly, you probably won’t be able to sell your real estate like you could with shares of stock. Then there’s the issue of cost, as acquiring a piece of real estate often requires a large upfront investment and ongoing maintenance or management costs.
A robo-advisor portfolio is a portfolio designed by an automated system using investment preferences input by an individual investor. Depending on the parameters you set, a robo-advisor will recommend a customized, diversified mix of investments that is suited to your goals, investment horizon and risk profile.
Robo-advisor portfolios from different investment companies generally include exchange-traded funds or mutual funds, two types of pooled investments, rather than individual stocks and bonds. In this way, a robo-advisor offers investors a quick and easy way to gain access to a broad range of equity and fixed-income securities.
Robo-advisory platforms typically charge lower fees than traditional, human financial advisors. While they may be inexpensive, investors won’t get the same kind of personalized investment advice that they would from a financial advisor or planner.
Still, if you’re someone who struggles to make investment decisions on your own, utilizing a robo-advisory service to put some money away for the long term is likely better than not investing at all.
Tax-efficient, long-term investing with Roth IRA
Using a Roth individual retirement account (IRA) to save for the long term is a proven way to grow wealth. Because contributions to a Roth IRA are made with after-tax dollars, your investments grow tax-free, and withdrawals in retirement are generally tax-free as well.
Roth IRAs have no required minimum distributions during the account holder’s lifetime. That means you have tremendous flexibility when it comes to letting your money grow for as long as you want.
If you’re thinking about your financial legacy, a Roth IRA can be an excellent estate-planning tool, as you can pass wealth to your heirs tax-free.
How to best invest for the long term
The best way to start investing for the long term is to define your financial objectives. Determine whether you are saving for retirement, a home, your child’s education or something else. If you will need the money in five or more years from now, your investment is for the long term. Knowing your purpose for investing will help shape your strategy.
When you’re ready to put your money to work, evaluate your risk tolerance honestly. Some investments come with higher risks but may offer greater potential returns. Be sure your investment choices align with your risk tolerance to avoid unnecessary stress. Having a high risk tolerance isn’t necessarily better. If you get nervous and can’t sleep when the market is volatile, that’s not a high risk tolerance, and that’s OK.
Likewise, if you only have a few years before retirement or you’re already in retirement, it’s generally wise to minimize your risk. You need your portfolio to last, so you’ll likely want to start prioritizing income and safety over capital appreciation.
Of course, diversifying your portfolio is a must. In other words, spread your investments across different asset classes, such as stocks, bonds, real estate and possibly alternative investments, such as commodities. Diversification helps to mitigate risk because different asset classes often perform differently under various economic conditions. You can think of it this way: If one investment zigs, you want another to zag.
To arrive at our list of best long-term investments, we looked at numerous factors, including risk tolerance, long-term investing goals, asset allocation and which assets are suitable for long-term holding periods. Tax implications, including the benefits of investing in a tax-advantaged account like a Roth IRA, also played a part, as did investment fees and costs.
Frequently asked questions (FAQs)
There is no “good” or “bad” time to buy stocks for a long-term investment. However, price appreciation and compound growth are generally most pronounced for those who start investing early in life. By beginning to invest early in your adult life, you’ll give yourself the best chance of building a solid nest egg by the time you’re ready to retire. On the other hand, if you wait to invest because you think prices are too high or you’re unsure that you’ll pick good investments, chances are you will miss out on the returns you’ll need to live a comfortable retirement. If that sounds like you, consider using a robo-advisor or talking to a financial advisor who can build a plan for you.
Long-term investments are good because they give your money the best chance to grow into meaningful wealth. However, investing for the long term takes time and patience. Some folks try to “time the market” and move in and out of investments with the hope of making a quick buck. But that’s typically not a sound investment strategy. Instead, take a long-term perspective. Use the power of compounding to your advantage. It can be especially powerful when it takes place within your tax-advantaged retirement accounts.
I'm a seasoned financial expert with extensive knowledge in long-term investing, asset allocation, and wealth management. Over the years, I've successfully navigated various market conditions and helped individuals make informed decisions for their financial future.
Now, let's delve into the concepts covered in the article about long-term investing:
Stocks: Investing in stocks provides growth potential, though they can be volatile. For long-term goals, the focus is on harnessing the growth that stocks offer.
Bonds: Bonds are debt securities offering regular interest payments. They are considered lower risk than stocks, providing stability and income to offset stock market downturns in the long term.
Real Estate: Real estate investments, including Real Estate Investment Trusts (REITs), offer diversification. They can bring stability, appreciation, and cash flow, but come with challenges like illiquidity and upfront costs.
Commodities: Physical goods like gold and oil provide diversification, offering returns uncorrelated with traditional stocks and bonds. They may act as a hedge against inflation.
Growth Stocks: These stocks, often in the technology sector, offer higher returns but come with higher risk. Diversification with other sectors is crucial to mitigate risk.
Dividend Stocks: Dividend-paying stocks, especially from established companies, provide a consistent income stream. Reinvesting dividends can enhance returns through compounding.
Value Stocks: Undervalued stocks, usually trading at low price-to-earnings ratios, offer diversification. They historically provide competitive returns, often outperforming growth stocks in certain market environments.
Robo-Advisor Portfolio: Automated portfolios based on individual preferences offer a diversified mix of investments. They are cost-effective but lack the personalized advice of human financial advisors.
Roth IRA: A tax-efficient way for long-term investing. Contributions are made with after-tax dollars, and withdrawals in retirement are generally tax-free. It offers flexibility and can be used as an estate-planning tool.
Investment Strategy: Defining financial objectives, evaluating risk tolerance, and diversifying across asset classes are key. Understanding the purpose of investment (e.g., retirement) shapes the strategy.
Remember, long-term investing requires patience and a focus on goals. Timing the market isn't a sound strategy, and harnessing the power of compounding within tax-advantaged accounts is emphasized for building meaningful wealth over time.