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. Hereās how to use long term investments to optimize your financial growth.
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What is a long term investment?
Thereās no official definition of a long term investment. However, most experts usually view an investment as ālong termā 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, canāt 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.
Different types of long term investments
Savings accounts. These accounts are unlikely to keep pace with inflation due to historically low rates of return.
Stocks. Stocks let you own a small This is where you own a small part of a company. Many larger companies pay dividends to shareholders so you could earn income as well as.
Equity funds. These funds invest in a wide range of stocks, giving you diverse exposure to the market.
Index funds. This is a type of equity fund that invests in all the stocks included in a particular index like the S&P 500.
Bonds. These are sold by governments or corporations and are generally lower risk than stocks and funds.
Property funds. These funds invest in real estate or in shares of property companies.
Commodities funds. These funds invest in raw materials like gold, silver, precious metals and energy. Itās also possible to buy a fund that invests in companies that mine precious materials or energy resources.
Investment property. Some long term investors choose to buy a property to rent out and earn income.
Can I make money with long term investments?
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 wonāt 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 youāre 20 and it grows at a rate of 5% annually (assuming interest compounds monthly), itāll be worth $16,470 after 10 years, $27,126 after 20 years, $44,677 after 30 years and $73,584 after 40 years.
Should I choose high or low risk long term investments?
Itās a good idea to get independent financial advice when youāre 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 youāre a long term investor then you may want to consider investing in some medium to high risk investments as part of your portfolio. Thatās because you donāt 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.
What are some strategies or options for long term investing
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:
Passive investing. This focuses on investing in low cost, index-tracking funds.
Growth investing. This approach focuses on businesses that are expected to grow quickly in the future. These companies might not yet be profitable or might only have small profits, but there is the potential to increase sales and enjoy high stock price growth.
Value investing. This focuses on investing in companies that may be undervalued based on financials and future potential.
Dividend investing. This approach prioritizes owning stocks that pay regular cash dividends, which can generate income and boost your portfolio if you reinvest the dividend income into more stocks.
Many long term investors opt for a mixture of strategies, combining passive investing with stocks geared towards growth, value and dividend investing.
Where can I find help with long term investments?
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.
Where can I find long term investments?
There are many different options for long term investors. Here are some popular ways to invest:
Join a workplace pension plan and make contributions. Most providers offer a choice of investment funds, so you can pick those suited for long term investments.
Open an IRA. Make tax-deductible contributions, and pay income tax when you make withdrawals later in life.
Open an investment account with an online investment platform. Many trading platforms offer portfolios of stocks as well as the opportunity to invest in individual stocks.
Pros and cons of long term investing
Pros
Benefit from compounding, which can grow your money significantly over time.
Benefit from dollar cost averaging, which involves investing gradually over many years. This reduces your risk that youāll buy when the market is high and lose money on your investment.
Can pick higher risk investments, because youāll have the time to bounce back from slumps in value.
Cons
Not suitable if you need to access your investment within 5 years.
May lose value in the short term. Investments like stocks fluctuate significantly in value, so you risk losing money in the short run compared to keeping money in a savings account.
Open an investment account
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Bottom line
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 youāre not sure whether long term investing is right for you. Investing for the future
Frequently asked questions
Stocks have historically outperformed cash and bonds in the long term. This is because investing in stocks allows you to own a little piece of a company. When that company is successful, shareholders benefit from a rising stock price.
Long term investing is worth it because it will give your investments a chance to grow significantly over a long period of time. You are much more likely to make money with long term investments than short term investments.
It's very hard to predict the best time to buy stocks, as prices fluctuate so much. That's why most experts recommend investing as soon as possible, so your investments have a long time to grow. If you invest regularly, buying when stocks are cheap and expensive, then the effect of market rises and falls will average out over time.
Any type of investment can be dangerous, because there's always a risk of investments dropping in value or even becoming worthless. A good way to guard against dropping stock prices is to diversify your investments across lots of different sectors, industries and regions.
Alice Guy is a Suffolk-based finance writer, a busy mum of 4 older kids and a self-confessed personal finance geek. She trained as a chartered accountant with KPMG London before working for Tesco Plc as a business analyst. She loves to write about budgeting, saving, investing and building wealth.
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