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.

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:

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.

There are various ways you can approach long-term investments, but some of the most popular ones in 2023 include the following.

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.

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.

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.

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%.

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.

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.

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.

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.

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.

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.

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.

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.