Long-term investments are typically made for a period of at least five years.
They can be a great option in today’s volatile markets and unstable economy, and thanks to a vast variety of choices to choose from, there’s something for everyone in the world of long-term investing.
If you are a new investor, you should first understand the pros and cons of various investment options. You can find information online or seek advice from a trusted source, such as a colleague, family member, or a professional financial advisor.
You don’t want to spend your hard-earned money on investments that won’t deliver good returns. That out of the way, what are the best long-term investments out there? Which options offer the best returns?
Exchange-Traded Funds (ETFs)
An exchange-traded fund (ETF) is a type of fund that owns underlying assets such as bonds, stock shares, oil futures, and foreign currency, and divides ownership of the assets into shares.
ETFs function more like mutual funds. With ETFs, however, you can trade your securities any time the market is open in a similar manner as common stock on an exchange.
They are one of the best low-cost, long-term investment options in which you can put your money. ETFs usually track stock indexes. However, there some ETFs that invest in currencies, bonds, commodity markets, and other asset classes.
While ETFs are typically set up as open-ended funds, some ETFs are set up as unit investment trusts (UIT), meaning the fund must have a specified date when it will end.
If you invest in an ETF, you are entitled to a percentage of the profits, which can be in the form of interest or dividends. You also may receive a residual value in the event the fund is liquidated. ETFs are normally more tax efficient than mutual funds.
Namely, buying and selling mostly takes place through an exchange. The ETF sponsor doesn’t have to redeem shares whenever you want to sell or issue new share whenever you want to purchase. This tax efficiency helps to make ETF an excellent, low-cost investment option.
However, as with any investment, it’s imperative that you understand what you are purchasing and why you’re investing there. You can invest in ETF through an online broker or traditional brokerage firms.
Keep in mind that most brokers, whether online or otherwise, charge a commission to trade ETFs.
Real Estate Investment Trusts
If you are looking to invest in something more than just an owner-occupied house, but you don’t have enough capital, you can consider investing in real estate investment trusts (REITs).
REITs give you an opportunity to invest in commercial real estate with relatively little capital. This real estate may include the following:
- Office complexes
- Warehouse or industrial space
- Shopping complexes
- Large apartment complexes
One of the major advantages of REITs is that you can invest in them just like you do with stocks. You can purchase shares in the trust and participate in the ownership of the underlying real estate. You also get to enjoy the benefits of professional investments management.
When you invest in REITs, your return will generally come from equity ownership or mortgage financing. In the case of equity ownership, the underlying real estates are normally commercial in nature.
REITs return at least 90 percent of their profits to investors in the form of dividends. Another great thing about this type of investment is that you can purchase or sell your stake in a REIT whenever you want.
A mutual fund is a type of actively-managed fund. It is a collection of investments picked by an experienced financial manager pooled together into one major fund. The success of a mutual fund depends largely on the skill of the manager.
One of the primary attributes of a mutual fund is diversification. Investing in a mutual fund helps you to spread risk by spreading your funds into a variety of investments.
Consequently, you safeguard your investment and increase the chances of growth while avoiding putting your eggs all in one basket. Mutual funds are one of the best long-term investments to put your money in.
An index fund is a special kind of mutual fund. Its portfolio works by matching the individual assets indicated in a particular market index. The Standard and Poor’s 500 (S&P 500) index is an excellent example of a market index. Index funds are a stable and diversified investment.
The fact that an index fund holds several different companies helps you gain the benefit of a mutual fund as far as spreading your risk, but also offers some guidance by narrowing your options to a specific market.
Given this, the failure of one company may not have a significant effect on your entire index fund. Moreover, index funds frequently deliver high returns in the long run, which makes them a good long-term investment option.
Stocks are one of the most popular long-term investments today as a result of numerous advantages.
They are paper investments, and hence save you the stress that comes with managing a physical business or property. Stocks give you the opportunity to invest in the economy as they represent ownership in profit-making corporations.
Another great thing about investing in stocks is that you are assured of a steady income in the form of dividends. Additionally, most stocks are very liquid, meaning they are quick and easy to purchase.
It’s a good idea to buy stocks from many different companies to help spread your risk. You can also purchase stocks from the international market.
According to the S&P 500, stocks deliver an average return of 10 percent per year, including both capital gains and dividend income. This kind of return for over five years can be a substantial amount of money.
Not to mention, you will generally get this return despite issues that may affect economic stability, such as depressions, recessions, and stock market crashes. It is always advisable to have some of your funds invested in stocks.
A bond is a type of loan that you lend to a company or government for a specified period. The issuer of the bond may offer a variable or fixed interest rate. At the end of the specified term, the company or government entity will return your loan plus the interest earned.
This interest is your profit for the investment. One of the best things about bonds is that they are not as volatile as stocks.
It is advisable to invest in bonds that have a maturity time of at least ten years, as they deliver better returns compared to shorter-term bonds. It is also desirable to choose bonds that are guaranteed.
Bonds are typically considered an integral component of a diversified, long-term investment portfolio. They will be your ideal investment option if you wish to see your investments grow steadily over a number of years.
Dividend Reinvestment Plans (DRIPs)
Dividends Reinvestment Plans (DRIPs) are another type of investment that will see your money grow steadily over a considerable period.
With DRIPs, you start by purchasing shares in a company. Next, you arrange with the company to not have your dividends paid in terms of cash. Instead, the company will re-invest your dividend earnings in more of their shares on your behalf.
You can decide how long you want to continue this process and are under no obligation to continue for as long as you own the stocks. You can sell your shares or terminate the DRIP and receive your dividends in the usual ways.
Retirement accounts are a type of account that enables you to invest in stocks, mutual funds, bonds, and ETFs among other types of investments.
With a retirement account, you probably won’t be able to access your funds until you are at least 59.5 years old. If you want your funds earlier than that, you’ll need to pay a 10 percent penalty and may suffer tax consequences as well.
There are several different types of retirement accounts. However, Roth individual retirement accounts and traditional individual retirement accounts (IRA) are the most common.
With Roth IRA, you are allowed to contribute on a pretax basis if you meet specified income requirements. With a traditional IRA, your money grows tax-free. However, it is subject to tax when withdrawn.
Conversely, funds invested in Roth accounts usually are not subject to tax when withdrawn. Unfortunately, you can’t invest in a Roth IRA if your income is above a given level.
Overall, retirement accounts are an excellent way to save for your retirement on a tax-deferred basis. They are designed to help you stock away long-term funds for retirement purposes.
One of the significant disadvantages of these types of investment is that you normally can’t access your funds until at least age 59.5—and it’ll cost you dearly if you need your funds before then.
Art is one of the most reliable long-term investments. It can be an excellent option for high-net-worth individuals looking for long-term investment ideas that also offer a dual-purpose as home decor.
You can engage an experienced art specialist to help you find some strategic pieces of art that have the potential to deliver a good return in the long term.
While you may not receive dividends or interest, your investment will grow in value over time should you ever need funds in the future. Many also find art collecting a pleasurable pastime.
If you are looking for the best alternative to stock, though, real estate would be an ideal option for you. Real estate has been delivering similar returns to stocks since World War II at the least. The simplest way to invest in real estate is by purchasing your own home.
You can purchase an owner-occupied home with as little as 3 percent down in addition to closing costs. That means if you have $4,500, you can afford around a $145,000 house. However, keep in mind that various factors affect how house values rise.
Not only will the property and home continue to grow in value providing you usable equity, but should you choose to live elsewhere the house can be rented for passive income purposes. A good chunk of long-term investors retire on rental income.
Investment in gold has been around for centuries. Many people consider this precious metal as a great investment tool since it serves as a measure of wealth. One great attribute that makes gold a perfect investment opportunity is that its value increases over time.
It’s worth noting, however, that the appreciation of value is ordinarily slow and steady. If that’s not an issue, though, then gold is a fantastic long-term investment option.
A zero-coupon is a type of debt security that doesn’t offer interest, but it is provided at an exceptionally high discount. It is also referred to as a deep-discount bond. This discount is what counts as profit when the bond is eventually redeemed for its face value.
For example, you may purchase a $1,000 bond at a discount for $800. The $200 return, plus coupon payments you receive on the bond, is your return for holding the bond. Zero-coupon bonds are normally long-term investments.
They typically have a maturity period of at least ten years. Some investors shy away from this type of investment, thanks to the fact that they don’t provide any current income.
However, other investors consider zero-coupon bonds a perfect vehicle for reaching long-term financial goals. With the deep discount, investors can grow small amounts of money into significantly large sums over several years.
Another thing that makes zero-coupon bonds a great option for long-term investment is that you can tell the exact amount of money you will receive when the bond matures.
Before investing in zero-coupon bonds, you should realize that they are characterized by phantom taxation. This taxation is one of the factors that discourage investors.
While you will not be receiving any interest payments over the life of the bond, you will still owe tax on the bond’s appreciation every year. Fortunately, there are several ways to avoid this kind of taxation.
You can consider keeping your zero-coupon bonds in a tax-deferred account. Another useful idea is to purchase tax-free zero-coupon bonds, which are generally issued by municipalities.
Some companies issue zero-coupon bonds, but it is normally advisable to buy zero-coupon bonds issued by the federal government. U.S. government-issued bonds are safer because they are backed by the full faith and credit of the government.
As such, they have an exceptionally low risk of default.
Do you have some extra cash after you’ve invested in all the major investment options? You can consider putting some of it in special collections. This type of investing involves buying and maintaining valuable items such as classic cars.
Special collections are referred to as hard assets and can be exceptionally rewarding after a long period. Before you put your money in this type of investment, it is essential to consult with a relevant expert.
You want to be sure you are purchasing the right items with the potential to deliver a decent return in the long term. If you know what you are doing, collecting valuable items can be a tremendous long-term investment option.
Best Long Term Investments Bottom Line
There are numerous long-term investment options, each with their own merits and drawbacks. If you have no idea or just learning how to invest, be sure to choose an investment that suits your financial goals.