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Long term investments
Find out how long term investments work and how to use long term investments to build your wealth.
The 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 optimise your financial growth.
What is a long-term investment?
There’s no official definition of a long-term investment. However, most experts usually view the investment as “long term” when you intend to keep it for five years or more.
Short-term investors, who tend to sell their investments in less than five years, can’t afford to invest their money in higher-risk investments. As a result, they may have to sell their investment when the market slumps and suffers a loss.
In contrast, long-term investors can afford to make somewhat risky investments, knowing they can reap the rewards over a long period. For them, long-term growth is more important than shorter-term slumps.
Different types of long-term investments
- Savings accounts. These savings accounts are unlikely to keep pace with inflation due to historically low rates of return.
- Stocks. Stocks let you own a small part of a company. Many larger companies also pay dividends to shareholders so you can earn income. Stocks of such large companies, known as ‘blue-chip’ shares, are usually held for the long term as their performance can weather volatile market conditions. Note that not all blue-chip shares pay dividends.
- Equity funds. These funds invest in a wide range of stocks, giving you diverse exposure to the market.
- Index funds. This type of equity fund invests in all the stocks in a particular index like the S&P 500.
- Bonds. Bonds are financial instruments sold by governments or corporations and are generally lower risk than stocks and funds.
- Property funds. These funds invest in real estate or shares of property companies.
- Commodities funds. These funds invest in raw materials like gold, silver, precious metals and energy. It’s 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 won’t need the money for a while. As a result, 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. However, 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 more significant returns in the long run as you are averaging out the purchase price of your investment. However, if you invest in one go, you will likely miss buying opportunities when the price of investment has dropped.
- Long-term investors have time to benefit from compounding 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 ten 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?
Getting independent financial advice when setting up an investment portfolio is a good idea. A financial adviser will consider your circumstances and risk tolerance before suggesting suitable investments.
In general, if you’re a long-term investor, 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.
What are some strategies or options for long-term investing?
The strategies for long-term investing depend on your financial circumstances and your attitude toward 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 finding long-term investments, 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. Some stock trading platforms, such as Interactive Brokers and Syfe Wealth, also provide premium accounts with access to financial advisors so that you can get more investment advice.
Where can I find long-term investments?
There are many different options for long-term investors. Here are some popular ways to invest:
- CPF Investment Account. For Singapore citizens who work here, you can use your CPF account to invest in various investment schemes. This increases your retirement funds without using your out-of-pocket cash.
- Top up your CPF Retirement Account. Singapore citizens with CPF contributions can also choose to top up their Retirement Account(RA). This will allow them to withdraw more funds at age 65.
- 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
- 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 the risk that you’ll buy when the market is high, and you lose money on your investment.
- You can pick higher-risk investments because you’ll have the time to bounce back from slumps in value.
- Not suitable if you need to access your investment within five years.
- It may lose value in the short term. Investments like stocks fluctuate significantly, so you risk losing money in the short run compared to keeping money in a savings account.
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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 unsure whether long-term investing is right for you.
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