The best long-term investments: Growth for the future
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In a nutshell
- Long-term investments are held by investors for longer in hopes of generating returns despite market fluctuations and uncertainty.
- When considering investment vehicles, there are a number of options to keep in mind, including stocks, bonds, mutual and index funds, 401(k) plans, real estate and individual retirement accounts (IRAs), just to name a few.
- Ultimately, the investments you select should align with your financial plans and risk tolerance.
What is long-term investing?
Long-term investing refers to holding investments for approximately five years. When compared to short-term investments, holding investments for a long horizon allows investors to weather fluctuations in the market. Some examples include stocks, index funds, mutual funds, IRAs and real estate.
Once you have decided to embark on long-term investing, you may want to consult with a financial adviser to assess how to begin. There are many available options, some with the lenders you already have accounts with, but resources such as WiserAdvisor also help match you with an adviser for your specific needs.
Tips for investing money for five years or more
When investing your money for five years or more, consider the following tips:
- Assess your financial goals and decide which investment vehicles best align with your long-term plans.
- Consider index funds such as those tracking the S&P 500 as they offer diverse investments.
- Partner with a financial adviser you trust or select a roboadvisor to ensure you portfolio is being rebalanced according to market shifts
- Continue educating yourself on investment types that may be appropriate for your financial objectives.
- Review your accounts and statements to track performance.
Leaving a legacy
To leave a legacy for your loved ones, create an estate plan and leverage financial vehicles such as life insurance to ensure your heirs can sustain basic financial needs in your absence.
Invest in 529 accounts for education savings and 401(k) and/or IRA accounts throughout your working years to maximize returns.
What makes a good long-term Investment?
A good long-term investment aligns with your financial plans and can withstand challenging market conditions like high inflation. Diversified portfolios that increase market exposure might generate attractive returns down the line.
Lastly, consider investing in tax-advantaged accounts such as 401(k) and IRA plans and those with low associated management fees to optimize your finances.
Basic rules for long-term investing
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Ensure that your investment strategy aligns with your risk tolerance, particularly as you near retirement and other milestones.
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Invest in company funds that have performed well, and be aware of the risks associated with your chosen investments.
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Stay informed and educated, and don’t try to “time the market.”
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Be aware of tax implications. Consult with a financial professional or accountant to assess how your investments might impact your taxes.
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Review and rebalance your portfolio, or consider using self-directed platforms, including:
- J.P. Morgan Self-Directed Investing Platform, which offers stocks, exchange-traded funds (ETFs), mutual funds and options; fixed-income investments, including bonds, U.S. Treasury securities and brokered CDs.
- Public App, which leverages AI-driven data to make better investments in assets such as crypto, art, stocks, bonds, funds and U.S. Treasury securities.
- SoFi Invest, which allows members to invest in stocks, ETFs, options, mutual funds and alternative funds. You may also opt into an automated investing account where Sofi invests the funds based on your portfolio allocations.
Best long-term Investments
The best types of long-term investments provide returns even when the market is unpredictable. Consider investing in value and growth stocks, bonds, target date funds, real estate and alternative assets such as commodities.
Index funds
An index fund is a type of fund that tracks and aims to mirror a specific index such as the S&P 500 or the Nasdaq 100. The funds invested in a specific index fund are then used to invest in the companies that make up that index.
ETFs
An ETF, or an exchange-traded fund, combines a diverse portfolio of securities to outperform an existing index. Investors receive diversified exposure, minimizing the risk associated with investing in just one asset class. They can be bought and sold throughout the day and carry low expense ratios.
There are different types of ETFs, such as Index ETFs, which track a specific index such as the S&P 500; commodity ETFs, which invest in commodities such as gold and oil; sector ETFs, which invest in specific industries such as technology; and bond ETFs, which focus on government, corporate and municipal bonds, just to name a few.
Mutual funds
Mutual funds are pooled investments from a large array of stocks, bonds and securities. Made up of many investors, some examples include money market and fixed-income funds.
Mutual funds can prove to be beneficial from an investment perspective due to their diverse nature, however, they tend to carry inherent risk. You’ll also pay fund management fees.
Dividend stocks
Dividend stocks refer to dividends paid by public companies to their shareholders in the form of stocks or cash. These companies are typically well-established and have a history of fiscal stability and brand awareness. Some examples include Verizon or Johnson & Johnson.
Related: How to invest in dividend stocks
Value stocks
Value stocks tend to represent shares of undervalued companies. They trade at a lower price than its perceived value, as they tend to be made up of older and more established companies.
While there is potential for appreciation, investors should do their due diligence and research to uncover if the stocks are undervalued for valid reasons.
Growth stocks
Growth stocks are shares in companies that are known to outpace traditional market growth. Some examples are Amazon, Apple and Netflix.
Growth stocks don’t typically pay dividends to their shareholders; they reinvest the earnings back into the company. Due to their high-growth valuations, growth stock investors are typically willing to pay a premium.
Unlike value stocks, growth stocks can be volatile so you’ll need patience and a high tolerance for risk.
Real estate
Real estate continues to be a popular long-term investment option for many investors due to its appreciation potential. In fact, according to RenoFi, housing prices in the U.S. have increased 48.55% in the past decade. Appreciation, passive income possibilities, tax benefits and the overall need for housing in a low inventory market have fueled great buyer demand.
While real estate is a strategic investment target for many people, the downsides include large upfront and maintenance costs, low housing inventory and lack of liquidity.
For those unable to invest in physical real estate at the moment, consider investing in REITs or real estate investment trusts. For example, RealtyMogul REIT is a non-traded REIT making equity and debt investments in commercial real estate properties.
Traditional and Roth IRAs
Traditional and Roth IRAs are two different types of retirement accounts. There are some key differences between these IRAs:
- Tax implications: Traditional IRA contributions can be deducted the year they are made, but Roth IRA contributions are made post-tax and therefore are not tax deductible.
- Income restrictions: Traditional IRA contributions do not have income limits (although this may impact tax deductibility), while Roth IRAs do.
- Age limits: A traditional IRA requires minimum distributions at age 73, while Roth IRAs do not have an age requirement.
- Withdrawal considerations: Traditional IRAs withdrawals are taxed during retirement as regular income. Meanwhile, Roth IRA contributions can be withdrawn at any time without penalty, however, the earnings may not.
Some lenders such as Robinhood now provide IRA matches on contributions to a traditional or Roth IRA. Robinhood Gold members receive a match of 3%.
401(k) plans
401(k) plans are tax-advantaged accounts provided by employers so their employees can save for retirement. In most cases, employees have the ability to make contributions, which the employer may choose to match up to a certain percentage. In 2024, employees can contribute up to $23,000 and individuals over the age of 50 can contribute an additional “catch-up contribution” of $7,500, according to the IRS.
401(k) plans are popular because contributions are made on a pretax basis. Account holders can choose from different asset allocations, including stocks, bonds and target date funds.
Employees may have to adhere to a specific vesting schedule in order to have access to their entire 401(k) account amount. For example, if you have $100,000 in your plan and you leave in year four of a five-year vesting schedule, you are only entitled to $80,000 of your plan savings, which can be rolled into another 401(k) plan or an IRA.
Lastly, you can take out a loan against your 401(k) plan. However, there may be penalties and tax implications if you do so before the age of 59 ½ and you don’t pay the loan back in a certain time frame.
Target date funds
Target date funds are investments that automatically adjust allocations as time goes on, becoming more conservative closer to the date the investor intends to withdraw the funds.
Typically used as retirement investment vehicles, these funds include a mix of stocks, bonds and securities. Target date funds tend to carry in its name the year funds can be withdrawn, for example, Target Date Fund 2050 will begin with higher allocations in stocks and then adjust to become more conservative over time, with allocations invested more heavily in bonds.
T-bills
Treasury bills are short-term debt securities backed by the U.S. Department of Treasury. Their maturity periods are quite short and range from four to 52 weeks. The interest earned on T-bills is subject to federal tax, but not state or local taxes. Due to their short maturity periods, they are considered highly liquid.
How to select the best long-term investments for you
To select the best long-term investments for your needs, define what your ideal financial future looks like and assess your tolerance for risk.
Look into investments that are diverse and provide the market exposure you are most comfortable with. You may decide to pick a few investments to start with or invest in diverse portfolios that consist of stocks, bonds, ETFs and mutual funds, for example.
Understand how your investments will impact your access to liquid cash. For example, if you want to buy a home in the next year, avoid locking up the cash needed for a down payment in investments that would penalize you for withdrawing the money early. A short-term investment, such as a high-yield savings account, may be a better option for you in this case.
Lastly, consider tax implications and decide when and how you’ll track your investments. An accountant or financial planner can help you crunch the numbers.
What are the tax implications of long-term investments?
As opposed to short-term investments, there may be certain tax implications associated with long-term investments. For instance, capital gains, or profits from the sale of assets held for more than one year, are subject to taxes. Tax rates are based on your taxable income and can fall in the 0%, 15% or 20% category.
Tax-advantaged accounts such as 401(k) and IRA plans, as well educational investments, might have limitations on early withdrawals and potential penalties.
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When assessing long-term investments, start slowly. Make sure you understand the various options and which ones align best with your overall financial picture as well as risk tolerance.
Consider the advantages of investing in value and growth stocks, bonds, target date funds, real estate and alternative assets such as commodities. That said, each asset class carries risk and is affected by time horizon. For example, with target date funds, your portfolio should be rebalanced to a more conservative position as you near retirement age.
In addition to educating yourself on the investment types that may be appropriate for you, consider partnering with a financial adviser to ensure your accounts are being reviewed and adjusted as the market changes. Monitor your accounts and how they are performing periodically to ensure your goals are being met.
Frequently asked questions (FAQs)
How much should I invest for the long-term?
There are no set rules on exactly how much should be invested, but rather, when. Start investing as soon as possible to maximize time in the market. Diversify across asset classes to mitigate risk and drive returns. Start slowly and consult with a financial professional to assess how much you should invest based on your current circumstances and what your long-term goals are.
What is the best time to start investing?
Start investing as soon as possible to maximize the benefits of compounding interest. Over time and if invested according to your financial plans, this money will likely grow.
If you have an emergency fund, are able to contribute to your savings every month and are already saving for retirement, then you’re well-positioned to look into other long-term investments to meet your financial goals.
How do I monitor my long-term investments?
The process of monitoring long-term investments depends on the frequency you are comfortable with. By opting into electronic communications, account administrators will typically mail you account statements and any other communications on a monthly or quarterly basis.
You and your financial adviser might also meet monthly or quarterly to review your accounts and investing strategy. If you’re not working with a financial adviser, decide when and how to rebalance your portfolio to ensure it is aligned with market fluctuations.
Regardless of the type of monitoring and review cadence you choose, long-term investments can also be monitored by online platforms that aggregate your accounts in real time so that performance can be tracked more easily.
What is the seven-year rule for investing?
The seven-year rule refers to the approximate time frame for an investment to generate returns. It serves as a guideline for investing and is not a guarantee. It can be helpful in setting medium- and long-term financial goals.
The rule is also referred to as the Rule of 72, which “estimates how long it will take for an investment to double at a fixed annual rate of return. For example, with a 10% return, it would take approximately 7.2 years to double,” according to Investopedia. While a helpful projection guide, the seven-year rule does not take into account inflation and other market fluctuations which may impact returns.