Successful investing is often the result of patience and time—especially when it comes to saving for important future goals, such as retirement. Investors with long time horizons have more reliable ways to grow their nest eggs, while also hedging against certain risks.
Long-term investments explained
As the name implies, a long-term investment is one that is intended to be held for a prolonged period of time. Rather than buying and selling these investments in a matter of days, weeks, or even months, long-term investments can be held for years or even decades.
Both individuals and companies can hold long-term investments. Although there are specific investments designed to be held for longer periods of time, investors also have the option to create long-term investments out of any security they choose.
The only true requirements of a long-term investment are that the capital invested isn’t critical to the immediate financial needs of the investing individual or company.
Advantages of long-term investing strategies
Most investors hold some combination of long- and short-term investments. The goal is diversification, a strategy that can help an investor ride out market downturns and volatility.
Although investing can result in immediate or short-term growth, long-term investment strategies can outperform by holding down trading costs, riding out market volatility and by receiving more favorable tax treatment.
Examples of long-term investments
Here are some of the most popular types of accounts and assets used in long-term investing.
A 401(k) is an employer-sponsored retirement plan that offers a tax-advantaged approach to investing. These plans often include a mixture of mutual funds, exchange-traded funds (ETFs), and index funds, and may also be structured as a target-date fund based on your expected retirement timeline.
Employees are able to dictate what percentage of their wages are contributed to their 401(k) account, up to the annual contribution limit set by the Internal Revenue Service. (For 2021, this limit is $19,500, or $26,000 if you’re over age 50.) Pre-tax funds will be deducted from employees’ pay automatically and invested in the 401(k) plan. These funds may or may not be matched by the employer.
The actual investments held within a 401(k) plan will vary from one employer to the next, and in some cases, employees can even adjust their plan’s allocation. Generally, there are management fees involved with 401(k) plans, so it’s important to analyze the options being offered by your workplace.
The 401(k) plan is strictly a long-term investment account, offering investors a tax-advantaged way to save for a retirement that may be decades away. In fact, there are early withdrawal penalties in place if you take out money before age 59½.
Another long-term investment is the IRA, or individual retirement account. These investments are, as the name specifies, intended to help save for retirement, and they are offered by a variety of financial institutions.
IRAs come in two different flavors, depending on your income today and your plans for the future. Traditional IRAs are tax-advantaged accounts, allowing for pretax contributions that can grow tax-deferred. When the time comes to withdraw your IRA savings in retirement, you’ll pay income tax on the withdrawals at your then-current tax rate.
The other type of account is a Roth IRA, which allows for tax-free investment growth. With a Roth IRA, your contributions are made with after-tax funds, based on your tax bracket today. When you go to withdraw funds in retirement, they will be available to you tax-free.
Funds contributed to an IRA can be invested in a range of different assets, including mutual funds, stocks, bonds, and even certificates of deposit (CDs). Whether a traditional or Roth IRA is right for you depends on your current income and your projected income in retirement.
Bonds are generally considered relatively safe long-term investments, acting as a loan from an investor to an entity such as the government or a company. They are often used to help balance out more volatile investments such as stocks.
Most bonds offer consistent interest payments. Once the bond reaches its scheduled maturity date, the borrower will return the initial investment to the investor.
There are many different types of bonds, including municipal, agency, corporate, and US government bonds (also known as Treasuries). Each has its own level of risk and is also subject to a different combination of federal, state, or local taxes.
Exchange-traded funds (ETFs)
Exchange-traded funds, or ETFs, are a pooled collection of many different securities, which are sold and traded as shares on a stock exchange.
ETFs invest in a range of assets such as stocks, bonds, commodities, and even currencies.
These funds are traded throughout the day, just like shares on an exchange, and may even offer regular dividends to investors based on their growth over time. There are annual fees involved with ETFs, though they are usually lower than the fees charged on mutual funds.
Investing in real estate may be another route to consider when looking for good long-term investment strategies, though it can also be unpredictable.
Real estate investments might involve purchasing investment property—such as a rental house or a fix-and-flip—or investing in shares of a real estate investment trust (REIT). Both have the potential for long-term growth and may even provide a passive income stream.
The one you choose depends on your level of risk, how active or passive an investor you want to be, and even the capital that you have available to invest.
Though shares of individual companies are generally considered a more volatile investment, there are certain benefits to holding long-term investment stocks.
Because the return on stocks largely hinges on that specific company’s success, they offer the potential for strong growth in the long-term. However, picking the individual stocks that yield that growth can be a tricky process.
6 Important ingredients in long-term investing
- Patience: Long-term investing is not for the impatient. In fact, the growth can be painfully slow at times, tempting you to explore other short-term approaches instead. However, building wealth over years or even decades requires consistent saving and investing.
- Diversification: You’ve always heard not to put all of your eggs in one basket. This is because none of us know exactly what the economy holds, and how our investment plans could be disrupted. Diversification—or spreading your assets across a variety of investment vehicles and even industries—is a strategy generally used to hedge against losses due to market downturns, unexpected trends, and inflation.
- Consistency: Staying the course and remaining consistent are two key ingredients of long-term investing. Without early and regular contributions, investors risk losing out on the compounding interest, dividends, and investment gains that can make or break retirement plans. Resisting the urge to pause investment efforts, even in the midst of unexpected expenses, can help investors stay on the path toward their goals.
- Aversion to trends: Internet forums, friends, and social media are full of information about short-term trends. Few, however, successfully time the market.
- Realistic expectations: Many long-term investment calculators are available online that can help you estimate potential investment returns in five, 10, or even 30 years. These tools are not a guarantee of future success, but can help you set realistic expectations and plan accordingly.
- Expert guidance: Investors can benefit from the guidance and recommendations of a financial expert. They can help set realistic goals, optimize your investment mix, take advantage of tax benefits, and know where to put your money today so that it grows for tomorrow.
How to get started with a long-term investing strategy
To get started with a long-term investment strategy, ask yourself the following 3 questions.
- What are your goals? You can’t work toward a goal that you haven’t identified. When do you want to retire? How much money do you need in retirement? What level of risk are you willing to take on?
- What is your budget? How much money can you afford to invest in your long-term strategy? Are there ways for you to cut expenses elsewhere or earn more, in order to invest more?
- How much risk can you tolerate? Your risk tolerance will inform your investing strategy and portfolio. Think about how much appetite you have for risky investments.
Side note: Try Titan’s free Investment Calculator to project your potential investment returns over a period of time.