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It’s not easy to make a quick buck via the markets, but investors who focus on the long term are usually rewarded.
Whether you’re planning for a big purchase like a home, saving for retirement or building up a college fund for your child, it’s typically wise to invest in assets that have historically produced strong returns over time.
By making sound long-term investments, you’ll likely reach your financial goals sooner than if you just hold cash, which can lose value over time due to inflation. Financial advisors say long-term investing is one of the best ways to build wealth.
Investors are faced with many options when it comes to building a long-term investment strategy, so it’s important to make thoughtful decisions about where you’re putting your hard-earned money.
Table of Contents
What are long-term investments?
Long-term investments usually refer to investments you hold for multiple years or decades.
People who remain invested in assets for many years benefit from compound interest, which is the interest that you make on your original investment plus the interest on that interest. This means that the longer you’re invested, the more money you can expect to make.
Investing for the long term is also often advantageous from a tax perspective compared to short-term investing, because profits on assets you own for more than a year are considered long-term capital gains, which are taxed at a lower rate than short-term capital gains.
Disciplined investors spread their money out in a variety of different assets to maintain a diversified portfolio. Doing so means you don’t need to try to pick the one long-term investment that you think is going to perform best, and that you're lowering your risk by not putting all your eggs in one basket.
Best long-term investments
The best long-term investments include stocks, funds, bonds and alternative investments. Some of these investments, like stocks, typically comprise larger portions of an investment portfolio than other asset classes, but each one of these investment types could make sense to include in your portfolio, depending on your goals and risk tolerance.
Financial advisors usually recommend that investors have at least some exposure to stocks.
Investing in the stock market is a way to buy ownership of a fraction of a publicly traded company. You can buy stocks via an investment account — like a Roth IRA or taxable brokerage account — through an online brokerage, a trading app, a robo-advisor or via a financial advisor.
Owning stocks comes with risks. An individual stock’s price can tumble if the company performs poorly or if investors lose confidence in its future, so experts advise owning stocks across multiple industries, stocks of companies of different sizes, and both U.S. and international stocks to reduce your risk.
Even diverse stock portfolios can be vulnerable to significant losses, but over the long run, stocks typically recover from downturns, and have produced impressive returns over time. The average annual return of the S&P 500 index, which includes stocks of many of the largest U.S. companies, is about 10%.
There are lots of different types of stocks, but these are some options:
Investors generally pay a premium price to buy growth stocks, which are stocks of companies that are expected to grow at a significantly faster rate than average. While a growth stock’s price may seem high, investing can pay off if that company increases its profits over time and its stock price climbs.
Growth stocks have the potential to produce higher returns than other stocks, which is why they can be good long-term investments, but they can also be risky because their prices are based on anticipated growth that isn't guaranteed to come to fruition.
- Potential for high returns
- Typically don't pay dividends
- Can be volatile
Some companies attract investment by regularly sharing profits with investors. These payments are called dividends and are usually paid in cash on a quarterly basis, though dividends sometimes come in the form of additional stock. Companies that pay dividends typically aren't businesses growing at a fast rate, since fast-growing companies will often choose to reinvest earnings.
Like all other stocks, the share prices of dividend stocks fluctuate, so long-term investors who buy them are usually hoping to see the stock price grow while they benefit from dividends. Dividend stocks are generally considered safer investments than growth stocks, but that’s not always the case.
- Regularly share profits with investors
- Companies that offer dividends may grow at a slower pace
- Dividends are taxable
Unlike growth stocks, value stocks generally trade at lower prices relative to these companies’ business fundamentals like earnings, and they’re often issued by more mature companies. Many value stocks pay dividends, but not all.
Value stocks can be good long-term investments because they often come from fairly stable companies, and the returns they generate can add up over long periods of time.
- Often pay dividends
- Stock prices can rise significantly over time
- Value stocks can be hard to identify
- Generally have less upside potential than growth stocks
The phrase “small-cap” typically refers to stocks that are valued at less than $2 billion. These are generally younger companies with high potential for growth, but can also be volatile.
It could make sense to invest a fraction of your portfolio in small-cap stocks as they have the potential to produce significant returns — and in fact, financial advisors typically recommend that a portfolio include some small-cap stocks. Before they became the giants they are today, companies like Apple and Amazon were small-cap stocks.
- Have the potential to grow to be large
- Offer diversification benefits
- Can be more volatile
Investing in individual stocks means buying shares in specific companies, as opposed to investing in funds, which are baskets of many different securities. If you’ve done your homework and are confident in a stock, it's not wrong to invest a small fraction of your money in that company — but just make sure your portfolio is diverse on the whole. Beginners to investing sometimes make the mistake of overexposing themselves to individual stocks.
- Potential for large investment returns
- More control over what you're investing in
- Much more risky than investing in funds
- Researching stocks can be time consuming
Funds allow investors to spread out their risk by investing in a basket of securities, as opposed to just one. Investing in funds can help you diversify your portfolio without spending tons of time selecting individual stocks and bonds.
You can invest in funds by buying directly from the company behind them like Vanguard, through an online brokerage account or with a robo-advisor, among other options. Popular trading apps like Robinhood allow investors to buy some types of funds, but do not offer investment opportunities in mutual funds.
Before investing in funds, make sure you understand what’s in them, how they’ve performed in the past and what fees they charge.
These are funds that invest primarily in stocks. Types of stock funds include mutual funds, which are usually professionally managed by investment advisors, and exchange-traded funds (ETFs), which often track an index, like the S&P 500.
- Many stock funds have historically generated high returns over time
- Can help investors diversify
- Fees may apply
- You can't decide which stocks are included
A bond fund is a pooled investment in a collection of bonds. Bond funds are considered safer investments than other assets, which makes them attractive for risk-averse long-term investors — though they still come with risk. There are "junk" corporate bond funds which offer more upside than other bond funds, but as their name suggests, they are of lower quality and are more vulnerable to bond issuers defaulting.
- Can help investors diversify
- Considered to have lower risk than stock funds
- Typically lower returns than stock funds
- Fees may apply
People saving for retirement sometimes choose to invest in target-date funds, which are often mutual funds and comprised of stocks and bonds that shifts as you get closer to retirement. As the targeted date for your retirement nears, the fund is adjusted to include more bonds and fewer stocks, since bonds are less prone to price fluctuations than stocks. They are popular offerings in 401(k) retirement accounts.
- Designed for retirement investors
- Diversification benefits
- Fees may apply
- Often have less upside than stock funds
An exchange-traded fund (ETF) is a basket of stocks, bonds or other assets, which investors can buy and sell during trading hours. They usually have lower fees than mutual funds because they are typically not professionally managed.
ETFs can be structured in a variety of different ways, but they typically track the performance an index.
- Lower fees than mutual funds
- Good for individual investors who want to buy a diverse mix of stocks
- May have management fees
- Some ETFs have less diversification than others
When investors buy bonds, they’re loaning money to the government or a company and earning interest in return. The rate of annual interest an investor earns from a bond is the coupon rate.
Bonds have maturity dates, which is when the principal (the amount initially invested) is paid back to the investor. The price of bonds can fluctuate, but investing in bonds is often considered less risky than investing in stocks.
Financial advisors generally recommend that investors who are nearing retirement include a more significant share of bonds in their portfolios than younger investors, since investors have less tolerance for risk when they're closer to retirement.
When interest rates fall, bond prices typically go up, and vice versa. That’s because bonds pay a fixed rate, so they’re more valuable when their rates are higher than those of newly-issued bonds. One of the risks of owning bonds is high inflation. Inflation rates can sometimes outpace the returns offered by bonds.
The Series I Savings Bond, or the I bond, is offered and backed by the federal government. It’s considered a safe investment that protects against inflation. The main way to buy I bonds is through the Treasury Department website.
Investors make money with I bonds from their fixed interest rate and from their variable interest rate, which is adjusted every six months based on inflation. After five years, I bonds can be redeemed with no penalty.
- Act as a hedge against inflation
- Considered risk-free
- Typically lower returns than other assets
- Early withdrawal penalties
Treasury-inflation protected securities (TIPS)
TIPS are also Treasury-issued government bonds that are designed to hedge against inflation. TIPS are sold in 5-, 10- and 30-year terms and come with fixed interest rates. Their principal value fluctuates over time, which differentiates them from I bonds. Investors can buy TIPS on the Treasury website. They can be bought and sold during trading hours on secondary markets.
- Can help protect an investor against inflation
- Interest rate can be lower than other bonds
- Not as advantageous if high inflation doesn't occur while they're held
Some investors may want to enter the realm of alternative investments, which refers to investments that aren't stocks, bonds or cash. Alternative investments can help diversify your portfolio and some offer more upside than other types of investments. But they can be highly volatility, which also makes them risky. Here are some types of alternative assets:
Real estate (REITs)
Buying into a real estate investment trust (REIT) is a way to invest in real estate without having to own a property. It’s a pooled investment in income-producing properties. Investors in REITs are paid dividends, and you can buy and sell them on major stock exchanges. There are also REIT mutual funds and ETFs.
- Way to invest in real estate without having to own property
- Can help diversify your portfolio
- Fees may apply
- There may be tax implications
Crypto is still a very new type of investment, so it remains to be seen exactly how well it will hold up over the long term. Cryptocurrencies are digital assets that are decentralized, meaning they're not operated by banks or governments.
Investors can buy cryptocurrencies, including bitcoin, ethereum and many others on a number of exchanges, but it’s important to keep in mind that these are considered risky assets. Investors should also be aware of taxes on crypto profits. If you’re going to invest in crypto, many financial advisors recommend only putting 2-5% of your portfolio in it, tops.
- Potential for high returns
- Offer diversification from traditional assets
- Extreme price volatility
- We don't yet know how crypto will perform as a long-term investment
- Lack of regulation
What to know before long-term investing
Each type of long-term investment offers something different to investors. Making decisions about where to put your money can be hard, but it's important to focus on identifying what matters most to you, then trying to find investment options that match those priorities.
Some of the factors to consider before long-term investing include your risk tolerance and your investing goals. It’s also key to remember that you should always have a diverse portfolio, so try to avoid investing too much money in any one asset, especially if that asset is risky.
As you put together your investment strategy, one of your focuses should be ensuring that the composition of your portfolio is in alignment with your tolerance for risk. More risk is generally associated with larger returns in the long run, but taking on too much risk could leave you vulnerable in the event of an untimely market crash.
In many cases, younger investors who have a longer investment time horizon can afford to take on more risk than older investors, who often want to avoid risk as they near retirement. But risk tolerance varies from investor to investor, depending on their goals and circumstances.
Once you have a sense of how much tolerance you have for risk, you can let that help guide your investing decisions.
It’s crucial to consider when you’ll ultimately want to access the money you invest. Are you trying to put a down payment on a home in three years, pay for a child's education in ten, or retire in 30? Make sure you can access the money in that timeframe and without taking on too much risk.
While some assets can be sold at any time, others may come with a penalty if you need to cash out early.
Some assets also have higher price volatility.
Putting all of your money in stocks may be too risky, for example, because stock prices can drop in the short term.
How much you plan on investing
Long-term investing puts your money to work, whereas you'll likely lose purchasing power over time by holding cash. But as you're coming up with your investing strategy, determine how much money you can afford to actually put away for the long run. Investors usually shouldn't put money in long-term investments if they intend to withdraw that money within the next few years.
Why does it matter how much you plan to invest? For one, some types of investments, like mutual funds, may require a relatively large minimum investment for investors to get started. Other types of investments come with fees, which may make the value proposition less attractive to investors who are working with smaller amounts of money.
As you’re determining how much to invest, think about any debts you have and how much cash you’ll need if something unexpected happens, like job loss or a surprise medical expense. Investors with debt, especially high-interest debt, may want to focus on paying that off before investing. And financial advisors often recommend keeping an emergency fund in a safe place, like an FDIC-insured high-yield savings account or a money market account.
These types of accounts are also some of the best short-term investing vehicles. If you have money you won't need within the next year or so, it usually makes sense to put it somewhere you can expect to earn some returns without it being vulnerable to the volatility of the stock market.
While there’s nothing wrong with buying into some of the companies that you love and believe in most, remember not to put too much on the line with any one investment. It's important to diversify your portfolio, meaning spreading your money out across different types of investments to reduce risk. By investing in a variety of assets, you can help ensure that when one part of your portfolio fails, another holds steady or even does well.
Investments like ETFs make it easy to diversify in a low-cost manner. You can get exposure to dozens or even hundreds of companies with just one purchase order.
Be skeptical about hot tips
One of the hardest parts about investing is sticking with your plan and staying focused on your goals. Investors are constantly encountering advice online about the next hot investment, and some deviate from their investment strategy. Instead, do your own research or consult an advisor before making investment decisions and make sure you’re always keeping a diverse portfolio.
What to look for in long-term investments
While it’s nearly impossible to predict how any investment will do, there are some factors to consider when picking long-term investments.
Looking at performance, which refers to the long-term growth that investments have generated in the past, can help you understand how much you could make and how much you could lose on an investment.
An investment's track record is never a guarantee of future performance, however, and investors should also beware of recency bias, which refers to how you can’t count on an asset to produce strong returns simply because it has been performing well lately. By picking investments based on recent returns, you risk making the mistake of buying at a high point.
Risk that aligns with your risk tolerance
Are you aiming for an aggressive portfolio, or do you want to play it relatively safe? Answering this question is critical to long-term investing.
When you have an understanding of your risk tolerance, you can start researching investment options to see if they match that.
As you're choosing which ETFs and mutual funds to invest in, you can compare the "expense ratios," which is the fee you pay for the management and administration of a fund. Mutual funds usually have higher fees than ETFs, but you should still look for expense ratios below 1%. With ETFs, you can find expense ratios below 0.1%.