Key Takeaways
- A long-term investment is meant to be held for at least a full economic cycle, which is generally five years or longer.
- Commonly held long-term investments include publicly traded stock funds, bond funds, real estate investment trusts (REITs), long-term certificates of deposit (CDs) and annuities.
- Long-term investments are usually exposed to more significant risks than short-term investments, but they offer greater return potential.
What Are Long-Term Investments?
A long-term investment is an asset acquired with the intent of achieving one or more economic benefits, oftentimes, as part of a diversified portfolio for your personal finances. Long-term investments are intended to be held for an extended amount of time. Usually, this means at least a full economic cycle, which is generally five years or longer. However, many long-term investments are held for decades.
From an accounting perspective, investments expected to be held for a year or more are classified as long-term. Conversely, investments expected to be disposed of within the coming year are classified as short-term.
“Benefits of long-term investments include taking advantage of compounding by letting your money have more time to potentially grow.”
Toby Walters, CFA®Senior Financial AnalystToby Walters, CFA®, is a senior financial analyst with over 25 years of experience in financial research. His knowledge spans researching and analyzing financial data to developing a one-of-a-kind viewpoint on money-related topics.
What To Look For in a Long-Term Investment
When evaluating the merits of a long-term investment, an investor should focus on how the asset can help achieve his or her objectives — ideally, within the context of a diversified investment portfolio. The most prominent investment objectives are as follows:
- Income Generation
- The goal of generating income via interest-bearing savings accounts, coupon-paying bond instruments and dividend-paying stocks.
- Price Appreciation
- The goal of capitalizing on asset price appreciation, which means buying low and benefiting from price increases. Generally, stocks are the focus for price appreciation, but in some economic environments, bonds can appreciate.
- Liquidity
- The goal of ensuring you have access to cash, without taking a loss on your investment positions. It is critical for all investors.
- Capital Preservation
- The goal of ensuring the value of your investment does not decline. It is closely related to the liquidity objective, but an asset designed to preserve capital isn’t always readily convertible to cash.
- Diversification Enhancement
- A holistic goal, which is geared to ensure a portfolio is structured to experience the highest possible risk-adjusted return over the long term.
In addition to the beneficial aspects of a long-term investment, an investor must also consider the risks. Depending on the type of investment, these can include illiquidity, price volatility, interest-rate sensitivity and foreign-market instability.
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Top Long-Term Investments for 2023
There are various ways you can approach long-term investments, but some of the most popular ones in 2023 include the following.
- Domestic Large-Cap Stock Funds
- Domestic Small-Cap and Mid-Cap Stock Funds
- International Stock Funds
- Real Estate Investment Trusts (REIT)
- Bond Funds
- Long-Term CDs
- Annuities
Domestic Large-Cap Stock Funds
A stock is a financial security that represents an ownership interest in a publicly traded company. The interest gives you a claim on the company’s net earnings and net assets.
A domestic large-cap stock refers to a U.S. company with a large market capitalization (share price times the number of shares outstanding) relative to other companies. Generally, this means a market capitalization of more than $10 billion.
A large-cap stock fund is a vehicle that provides diversified exposure to many underlying companies in the large-cap space. Depending on your appetite for risk, these funds are structured to emphasize growth companies, value companies or a mix of the two.
As the name implies, growth companies have high prospects for above-average increases in revenues and profits, but they suffer badly during down-market cycles. Value companies, on the other hand, are more stable and mature. They trade at prices that fall below their intrinsic values, and they tend to pay higher dividends than growth companies.
A balanced stock fund, also referred to as a core fund, is comprised of both growth companies and value companies. These types of funds are the best proxy for the total large-cap universe.
- Minimum Investment
- For exchange-traded funds, the cost of one share; for mutual funds, the amount can vary, but is often $1,000.
- Stability/Risk Level
- Low to moderate stability and moderate to high risk.
- Liquidity Level
- High.
- Transaction Costs
- Exchange-traded funds don’t charge a load but may be subject to brokerage commissions; for mutual funds, the amounts can vary.
- Where To Invest
- Any reputable brokerage firm.
- Pros/Cons
- Domestic large-cap stock funds are a cornerstone for most portfolios, offering unrivaled potential for a combination of long-term growth and dividend income; however, these assets can be volatile, especially growth-oriented funds.
Summary of Domestic Large-Cap Stock Funds
Domestic Small-Cap and Mid-Cap Stock Funds
A domestic small-cap stock refers to a U.S. company with a small market capitalization relative to other publicly traded companies. A domestic mid-cap stock is slightly larger.
Generally, the following measures apply:
- Small-cap stocks have a market capitalization of $2 billion or less.
- Mid-cap stocks reflect a market capitalization between $2 billion and $10 billion.
A small-cap or mid-cap stock fund is a vehicle that provides diversified exposure to many underlying companies that fall outside of the large-cap space. These funds are comprised of less mature companies than large-cap funds. As a result, they have greater potential for growth, but they also exhibit more volatility and do not distribute as many dividends.
- Minimum Investment
- For exchange-traded funds, the cost of one share; for mutual funds, the amount can vary, but is often $1,000.
- Stability/Risk Level
- Low stability and high risk.
- Liquidity Level
- High.
- Transaction Costs
- Exchange-traded funds don’t charge a load but may be subject to brokerage commissions; for mutual funds, the amounts can vary.
- Where To Invest
- Any reputable brokerage firm.
- Pros/Cons
- High growth potential, but elevated levels of volatility, especially over the near term.
Summary of Domestic Small-Cap and Mid-Cap Stock Funds
International Stock Funds
An international stock refers to a non-U.S. publicly traded company. Generally, a distinction is made between developed market companies and emerging market companies. Developed market stocks are much more stable and predictable than emerging market stocks, but the latter has the potential to generate superior long-term returns.
An international stock fund is a vehicle that provides diversified exposure to many underlying companies in foreign markets. For novice investors, the best approach is to attempt to replicate the universe of international companies through a passive investment vehicle. This means acquiring an all-world (excluding U.S.) fund that has both developed market exposure, roughly 75%, and emerging market exposure, roughly 25%.
- Minimum Investment
- For exchange-traded funds, the cost of one share; for mutual funds, the amount can vary but is often $1,000.
- Stability/Risk Level
- Low stability and high risk.
- Liquidity Level
- High.
- Transaction Costs
- Exchange-traded funds don’t charge a load but may be subject to brokerage commissions; for mutual funds, the amounts can vary.
- Where To Invest
- Any reputable brokerage firm.
- Pros/Cons
- High growth potential and provides a diversification benefit to U.S. holdings, but elevated levels of volatility, especially in emerging markets.
Summary of International Stock Funds
Real Estate Investment Trusts (REITs)
Investing in commercial real estate is a classic long-term play. This asset class includes any property owned and operated for the sake of generating economic value, such as homes, apartment buildings, storage facilities, office buildings, shopping centers and industrial warehouses.
Investors can buy commercial real estate directly or indirectly through the shares of real estate investment trusts (REITs). Direct investment can be highly profitable, but it entails high dollar outlays, significant transaction costs and time-consuming maintenance. It also tends to result in highly concentrated positions. However, share-based ownership sidesteps these disadvantages, providing investors with a much more efficient way to gain exposure to the asset class in a diversified manner.
- Minimum Investment
- The cost of one REIT share; typically anywhere between $1,000 and $25,000 or more depending upon various factors.
- Stability/Risk Level
- Moderate stability and risk.
- Liquidity Level
- High.
- Transaction Costs
- None with competitive brokerage firms.
- Where To Invest
- Any reputable brokerage firm.
- Pros/Cons
- Excellent way to generate a relatively high level of income, with the potential for inflation-mitigating price appreciation; subject to steep price declines during market distress.
Summary of REITs
Bond Funds
A bond is a loan made by an investor to a company, sovereign government, or state or local municipality for a specified term. The loan is paid back at maturity. Meanwhile, the investor receives fixed-rate interest payments or coupons on the principal.
Generally, a bond makes coupon payments semiannually. Some bonds pay interest monthly while others pay interest annually. The zero-coupon bond is one type that pays no periodic interest. Rather, at maturity, a zero-coupon bond pays out more than the initial investment. The difference is interest compensation.
A bond fund is a vehicle that provides you with diversified exposure to many underlying bond instruments. Broad-based, investment-grade funds focused on the domestic market are some of the safest. For investors willing to assume more credit risk, bond funds with a non-investment grade allocation can provide incremental yield. Some funds also achieve yield enhancement through international positions.
Beyond the low-cost, diversified nature of bond funds, these vehicles provide another valuable benefit — the automatic reinvestment of cash from maturing bonds. This keeps you fully invested without any administrative effort.
- Minimum Investment
- For exchange-traded funds, the cost of one share; for mutual funds, the amount can vary but is often $1,000.
- Stability/Risk Level
- Moderate to high stability and low risk.
- Liquidity Level
- High.
- Transaction Costs
- Exchange-traded funds don’t charge a load but may be subject to brokerage commissions; for mutual funds, the amounts can vary.
- Where To Invest
- Any reputable brokerage firm.
- Pros/Cons
- Bond funds can provide a reliable source of income and add stability to an investment portfolio; bond funds are exposed to varying levels of credit risk and interest rate sensitivity.
Summary of Bond Funds
Long-Term CDs
A long-term certificate of deposit (CD) is a special savings account offered by banks and credit unions. It provides a guaranteed rate of interest, but the money invested must remain on deposit for a specified amount of time — typically, five years or longer. Early withdrawal also generally triggers a loss-of-interest penalty.
A long-term CD can be classified as either traditional or zero-coupon. A traditional CD makes periodic interest payments during its term. Then, at maturity, your initial deposit is returned.
Like a zero-coupon bond, a zero-coupon CD does not make any interest payments during its term. Rather, at maturity, a zero-coupon CD pays out more than the initial deposit. The difference is the investor’s compensation.
- Minimum Investment
- Generally $100.
- Stability/Risk Level
- Very high stability and very low risk.
- Liquidity Level
- Low.
- Transaction Costs
- None.
- Where To Invest
- Any reputable bank or credit union.
- Pros/Cons
- A CD is incredibly safe and federally insured up to $250,000 for an individual account and $500,000 for a joint account; early withdrawal will result in a loss-of-interest penalty.
Summary of Long-Term CDs
Annuities
An annuity is a financial contract between an insurance company and an individual. There are many different types of annuities, but they all work similarly.
- Fixed Annuities
- Offer investors a guaranteed rate of interest for a specified period, oftentimes, a lifetime. They are very safe and completely predictable.
- Fixed Indexed Annuities
- Offer investors the potential for higher returns than fixed annuities. They credit interest based on the performance of a market index, such as the S&P 500. Generally, your upside is limited but you benefit from downside protection via a guaranteed minimum rate of return.
- Variable Annuities
- Offer investors the highest possible return potential in the annuities market, but they are exposed to downside risk. These instruments are comprised of a portfolio of underlying investments, which can exhibit a high degree of volatility. Protections exist, but you can lose money with a variable annuity.
At a high level, annuities can be categorized as follows:
Fundamentally, an annuity entails a lump-sum purchase by the individual in exchange for a series of immediate or deferred income distributions paid by the insurance company.
- Minimum Investment
- The amount can vary.
- Stability/Risk Level
- Very high stability and very low risk, except for variable annuities, which are moderate stability and risk.
- Liquidity Level
- Low.
- Transaction Costs
- The amount can vary.
- Where To Invest
- Any reputable insurance company with a well-established offering.
- Pros/Cons
- The safest annuities provide guaranteed streams of income, which can be invaluable during turbulent economic periods; however, they expose investors to a high degree of illiquidity, inflationary risk and potentially high costs.
Summary of Annuities
In addition to the assets noted, many shrewd investors maintain high-yield savings accounts to ensure they have adequate liquidity. The most competitive financial institutions are currently offering interest rates in the 3% to 4% range.
Who Is Suited for a Long-Term Investment Strategy?
Anyone that has money to invest is suited for a long-term investment strategy. This includes retirees actively drawing down on their savings. Even for them, a long-term outlook is appropriate – at least, for a portion of their savings.
The key is to understand your investment horizon, which is the time until you expect to draw down on your principal investment and accumulated earnings. For many people, the easiest way to do this is to segment their horizons.
A simple segmentation strategy is as follows:
- Less than 1 year
- Between 1 year and 5 years
- Between 5 years and 10 years
- Greater than 10 years
The shorter the time horizon, the more liquidity you need and the less volatility you can assume, which limits your income and growth potential. The longer the time horizon, the less liquidity you need and the more volatility you can assume, which presents opportunities for relatively high income and growth.
Frequently Asked Questions About Long-Term Investing
An individual retirement account (IRA) is an IRS-qualified retirement account designed to hold long-term investments. An IRA helps you save for retirement in a tax-advantaged manner. Depending on the type of account you open, this means either upfront tax deductions on contributions coupled with tax-deferred growth (for traditional IRAs) or tax-exempt growth of contributions (for Roth IRAs).
A target-date fund is an investment vehicle that is largely associated with retirement and educational savings accounts. It gives you the ability to select an investment fund based on the date you plan to start drawing down on your funds. Selecting the appropriate fund is the only discretion required. Once selected, the administration of your investments is automatic and the appropriate mix of growth-oriented, income-oriented and liquid, stable-value investments is dynamically adjusted over time.
A robo-advisor portfolio is an automated, low-cost alternative to a portfolio constructed by a human financial advisor. It is constructed by a client-facing bot that leverages sophisticated computer algorithms to assess your investment objectives and tolerance for risk and generate an appropriate investment strategy. Typically, the strategy will reflect one of many predefined asset allocation profiles, which are all comprised of passive, fund-style vehicles, although there are robo-advisors that use actively-managed funds.
Buying individual assets is not an efficient way to construct an investment portfolio. It is costly, time-consuming and unlikely to produce an adequate level of diversification. Buying low-cost, fund-style investment vehicles, such as exchange-traded funds (ETFs) and mutual funds, is a superior approach. They can provide highly diversified access to an asset or group of assets, and they are generally sponsored by large, financially secure investment companies.
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