The length of time you hold on to an investment can impact your portfolio. Even small long term investments can grow into a healthy-sized portfolio over time. Here’s how to use long term investments to optimize your financial growth.
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There’s no official definition of a long term investment. However, most experts usually view an investment as “long term” when you intend to keep it for 5 years or more.
Short term investors, who tend to sell their investments in less than 5 years, can’t afford to invest their money in higher-risk investments. They may have to sell their investment when the market has slumped and end up suffering a loss.
In contrast, long term investors can afford to make somewhat risky investments, knowing that they can reap rewards over a long period of time. For them, long term growth is more important than shorter term slumps.
Long term investments can make more money than short term investments. This is for several reasons.
Long term investors can often afford to pick higher risk investments, because they won’t need the money for a while. On average, high risk investments tend to grow more than low risk investments.
Long term investors will be less affected by a stock market crash and can afford to wait until the market bounces back. Short term investors may need to access their investment right when the market has plunged.
Long term investors can benefit from dollar cost averaging, a strategy where you invest gradually over time rather than all at once. Dollar cost averaging often leads to bigger returns in the long run as you are averaging out the purchase price of your investment. If you invest in one go, you are likely to miss buying opportunities when the price of an investment has dropped.
Long term investors have time to benefit from compounding, which is when your investment wealth snowballs over time. For example, if you invest $10,000 when you’re 20 and it grows at a rate of 5% annually (assuming interest compounds monthly), it’ll be worth $16,470 after 10 years, $27,126 after 20 years, $44,677 after 30 years and $73,584 after 40 years.
It’s a good idea to get independent financial advice when you’re setting up an investment portfolio. A financial adviser will take into account your personal circumstances and your risk tolerance before suggesting suitable investments.
In general, if you’re a long term investor then you may want to consider investing in some medium to high risk investments as part of your portfolio. That’s because you don’t need the money for a while so you have time to wait for the stock market or another investment to bounce back from a slump.
The strategies for long term investing depend on your financial circumstances and your attitude towards risk. Here are some popular strategies for long term investing:
Many long term investors opt for a mixture of strategies, combining passive investing with stocks geared towards growth, value and dividend investing.
If you want help with finding long term investments then you can ask for advice from an independent financial adviser. They will review your financial circumstances and your attitude to risk before advising you on potential investments.
There are many different options for long term investors. Here are some popular ways to invest:
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Investing as early as possible and holding on to your investments gives your money lots of time to grow in value. It also lets you pick slightly higher risk investments, which often grow over time. Speak to an independent financial adviser if you’re not sure whether long term investing is right for you.
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