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7 best long-term investments

Slow and steady wins the race. Where to put your money to ride out volatility for potential gains.

There are benefits to giving your investments time to grow. A long time horizon will not only allow you to ride out the bumps in the market, but you can also benefit from things like compounding interest and fewer trading fees.

But to invest over a longer period of time, you need to have patience and time on your side. It may take longer to see profits and you might not have as much access to your money.

The role of long-term investments in your portfolio

Both short- and long-term investing have their pros and cons, but allocating a portion of your portfolio to investments that can grow over the long haul can help mitigate risk. For one, it gives your assets that pay out interest or profits the opportunity to compound. That is, the process of earning interest on interest.

Secondly, a longer time horizon helps build wealth through fewer trading fees and paying less in taxes — keeping more of your money available to invest. There are several long-term investments to consider adding to your portfolio, but here are the top seven.

Top 7 long-term investments

1. Stocks

Stocks offer investors strong potential for growth over the long term. While the day-to-day market can be volatile, the market tends to exhibit less volatility over longer periods. Historically, the stock market has provided average annual returns of around 10% over the long term.

The stock market comprises several categories of stocks to invest in, including:

Blue-chip stocks: Blue-chip stocks are shares of well-known companies with a strong growth history, many of which pay dividends. Examples of blue-chip stocks include:

Growth stocks: Growth stocks are stocks with earnings that grow or are anticipated to grow faster than the market average. These stocks generally do not pay dividends and investors typically invest in them with the hope of being rewarded with higher potential capital appreciation. Some examples of growth stocks include:

High-dividend stocks: Dividend stocks distribute a portion of the company’s profit back to its investors, usually on a fixed schedule. As long as you own shares of the company, you’ll receive the dividend payout automatically. The average dividend yield of the S&P 500 since 2003 has been between 1%—2%, so a stock that pays a dividend above this could be considered a high-dividend stock. Some examples include:

Small-cap stocks: Small-cap stocks are shares of a company whose market capitalization ranges from $300 million to about $2 billion. These companies have the potential to grow quickly, but they can experience greater volatility. Examples include:

Rewards

  • Potential for long-term growth. With a historical average return of around 10%, a buy-and-hold strategy can pay off.
  • Variety of stocks to help diversify your portfolio. There are thousands of stocks to invest in across a range of industries. By exploring different asset classes, you can further diversify your portfolio by varying your stock investments by sector, geographic location and company size.

Risks

  • You have to perform your own research. Unless you’re picking stocks randomly — which isn’t recommended — you’ll want to take the time to conduct research into potential stocks. If you don’t have that sort of time or interest, a robo-advisor might be more suitable. Many provide valuable research tools and varying levels of investment advice and insights.

2. Total market index funds

Index funds are passively managed funds designed to track the performance of a specific market index, such as the S&P 500 and the Russell 2000 Index. Since the manager of an index fund tries to mimic the returns of the index instead of picking and choosing stocks with the goal of beating the market, costs to shareholders are usually lower. Over the long term, this can translate into substantial savings compared to actively managed funds. Plus, most investment managers underperform the market. Tack on management fees, and you can see why index funds could be an attractive investment option.

Some examples of total market index funds include:

Vanguard S&P 500 ETF (VOO)

  • Total net assets: $254.7 billion
  • One-year return: 34.24%
  • Expense ratio: 0.030%
  • Investment minimum: $0

SPDR S&P 500 ETF Trust (SPY)

  • Total net assets: $400.7 billion
  • One-year return: 34.12%
  • Expense ratio: 0.095%
  • Investment minimum: $0

Vanguard Russell 2000 ETF (VTWO)

  • Total net assets: $6.2 billion
  • One-year return: 49.10%
  • Expense ratio: 0.100%
  • Investment minimum: $0

Schwab Total Stock Market Index Fund (SWTSX)

  • Total net assets: $17.6 billion
  • One-year return: 36.70%
  • Expense ratio: 0.03%
  • Investment minimum: $0

Rewards

  • Low upfront and ongoing costs. Many index funds don’t require a minimum investment, and the ongoing costs are relatively low compared to actively managed funds.
  • Passive investing. Instead of researching and picking and choosing each individual potential stock yourself, you can invest in a single index fund that tracks a market index.

Risks

  • Lack of flexibility. Investing in an index fund might give you less flexibility to react to price declines in the securities in the index.
  • Underperformance. While fees are usually low, they could be the difference between the index fund matching and underperforming its index.

3. Bond funds

A bond fund is a fund that pools investors’ money to buy shares of a portfolio of bonds or other types of debt securities. These can include government bonds, municipal bonds and mortgage-backed securities — or a mixture of types. Bond funds offer investors the benefit of diversification and professional management. They also tend to offer a reliable cash flow through regular distributions, which could make them a promising investment option for long-term investors.

Examples of bond funds include:

Vanguard Tax-Exempt Bond ETF (VTEB)

  • Total assets: $14.0 billion
  • One-year return: 3.12%
  • Expense ratio: 0.060%

Fidelity Advisor High Income Advtg Fund (FAHDX)

  • Total assets: $2.1 billion
  • One-year return: 20.69%
  • Expense ratio: 1.000%

iShares Core1-5 Year USD Bond ETF (ISTB)

  • Total assets: $6.0 billion
  • One-year return: 1.06%
  • Expense ratio: 0.060%

Rewards

  • Professional management. The bond fund manager can buy or sell bonds when interest rates rise or fall, potentially increasing returns and income.
  • Diversification. When you invest in a bond fund, you obtain exposure to a basket of bonds within the fund.

Risks

  • Management fee. Bond funds are actively managed, so you’ll have to pay a management fee, which can lead to lower returns.
  • Interest rate risk. Rising interest rates can push bond prices down, and funds holding bonds with longer maturities are subject to this risk.

4. Target date funds

Target date funds can hold a mix of stocks, bonds and other investments, and the mixture of investments gradually shifts over time according to the fund’s investment strategy. But the investments usually shift to become more conservative as the target date approaches. These funds are specifically designed with retirement in mind, making them a suitable investment for long-term investors.

The following are examples of some of the target date funds currently available:

Fidelity Freedom Index 2060 Fund (FDKLX)

  • Total assets: $2.3 billion
  • One-year return: 28.60%
  • Expense ratio: 0.120%

Principal LifeTime Hybrid Income Fund (PHTFX)

  • Total assets: $84.4 million
  • One-year return: 9.10%
  • Expense ratio: 0.360%

BlackRock LifePath ESG Index Ret Fd (LERAX)

  • Total assets: $2.3 million
  • One-year return: 13.01%
  • Expense ratio: 0.500%

Rewards

  • Professional management. Target date funds that are professionally managed offer a hands-off approach to investing.

Risks

  • Reaching the target date doesn’t mean you reached your saving goal. Investing in a target date fund doesn’t automatically mean you’ll have enough saved up by the time you reach the target date. Whether or not you meet your savings goal depends on various factors, including the amount you contributed and the fund’s performance.

5. Real estate

The buy-and-hold strategy can also work well for real estate investments. It can help protect you from housing price fluctuations, and rental properties simultaneously offer investors rental income and the potential for asset appreciation. Investors that hold properties for longer than a year before selling also pay a lower capital gains tax.

There are several ways to invest in real estate, including:
Real estate investment trusts (REITs): A REIT is a company that owns and operates income-producing real estate. Investing in REITS allows individuals to invest in large-scale, income-producing properties. Properties in a REIT can include office buildings, shopping malls, hotels and apartment complexes.

Real estate crowdfunding: Like any other crowdfunding venture, real estate crowdfunding involves investors pooling their money together to fund real estate projects and properties. This helps investors overcome the high financial barrier to entry. Some examples include:

Rental real estate: These are physical properties purchased by investors and inhabited by tenants, providing investors with a passive income stream and the potential for the property value to appreciate.

Rewards

  • Real estate has unique tax benefits. You can deduct things like property taxes and expenses associated with your rental property and the depreciation of your investment property.
  • Potential for steady cash flow. Once you get your rental property up and running, cash flow could provide steady, ongoing monthly income if your venture is successful.

Risks

  • Physical properties can require a lot of money upfront. You’ll need a down payment plus closing costs and money to repair or renovate the property to maximize rental income.
  • Rental real estate can be problematic. Problems with tenants can lead to a loss in income and time and money wasted in court.

6. Robo-advisors

Robo-advisors have emerged as a popular investing platform because they allow individuals to invest passively while taking advantage of low-cost financial advice. This can be a suitable option for long-term investors because ongoing fees are a fraction of the cost of investing your money with a human financial advisor.

Some examples of robo-advisors include:

Rewards

  • Passive investing. Your money is automatically invested into securities based on your preferred risk level.
  • Low fees. Robo-advisors manage your portfolio at a fraction of the cost of traditional, human financial advisers. Some platforms charge a flat $1 per month for the service, while others charge a small annual advisory fee — usually between 0.25% and 0.5%. Others provide the automated service free of charge.

Risks

  • Limited human interaction. There’s more to investing than answering a few questions about your risk tolerance. Human advisers may have decades of experience and can give the most personalized advice.
  • Limited abilities. Robo-advisors make recommendations based on only the information you provide, such as age and risk level. Human advisers, on the other hand, consider all aspects of your financial goals when deciding on the most appropriate investments.

7. Certificates of deposit (CDs)

A CD is a type of savings account, and it’s one of the safest places to park your money. When you invest your money into a CD, you invest a fixed amount for a fixed period of time. So even if interest rates drop, the interest rate on your CD remains fixed for the duration of the term.

CDs can be attractive long-term investment options because the longer the term, the higher the CD rate typically is. Money invested in a CD can also benefit from compounding. The interest earned on your money is added onto the balance of your CD, and that entire balance then earns more interest. Given enough time, small investments can become large investments.

Rewards

  • Safer than many other investments. A CD is a savings account, and FDIC-insured banks provide up to $250,000 in coverage per customer should the bank fail.
  • You can purchase both short-term and long-term CDs. Most banks offer CDs with terms from a few months to several years. If you divide your money between several CDs with different terms, you can take advantage of the liquidity of short-term CDs and the higher interest rates of long-term CDs.

Risks

  • Early withdrawal penalties. If you withdraw your money before the CD matures, you could get penalized. The exact amount of the penalty depends on the bank from which you purchased the CD.

6 tips for choosing the right long-term investments

Not all investment options are suitable for everyone. Here are some tips to consider when deciding which long-term investments are right for you.

  1. Get your finances in order. Establish a debt repayment strategy and fund your emergency savings first so you can figure out how much money you have to invest.
  2. Determine your time horizon. Different investing goals have different time horizons. Figure out when you need the funds you’re investing.
  3. Understand the risks. Every asset has its own unique risks. Understand what these risks are before you put any of your hard-earned money on the line.
  4. Diversify well. You can mitigate investment risks by diversifying your portfolio. Highly correlated assets move in the same direction.
  5. Consider the costs. Fees can erode your gains and accelerate your losses. Before you invest, think about how these costs will affect your returns.
  6. Review your strategy regularly. Your goals and investments can change over time. Check up on them regularly to ensure your allocations are still on target.

Is now the right time for long-term investments?

There are many benefits to investing with a long horizon, and the sooner you get started, the more time your money has to grow. Markets are always changing, and having a mixture of short-term and long-term investments helps ensure your portfolio has the greatest potential for growth.

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