There’s an almost constant investment push-pull going on between safety and growth. Safety offers protection of principal, but not much future potential.
In fact, with today’s interest rates, safe investments can lose money through inflation.
That’s where growth becomes necessary. It has risks, but the best long-term investments will overcome those risks, and grow your money many times over.
Long-Term Investment Guide:
Why Long-Term Investments Need to be Just That
If short-term investing is about capital preservation, long-term investing is about wealth creation.
It’s about building the kind of investment portfolio that will provide you with income for later in life, and for the rest of your life. That could be retirement, or sometimes sooner.
But it can only happen if you create the amount of wealth necessary to provide the level of income you need to live.
Long-term investing means accepting a certain amount of risk in the pursuit of higher rewards. This generally means equity type investments, like stocks and real estate.
They tend to be the best long-term investments because of their potential for capital appreciation.
They need to make up the bulk of your long-term portfolio allocation.
An interest-bearing security may produce only a few percentage points gain each year. But capital appreciation can produce double-digit returns, and lead to increasing your portfolio many times over in the future.
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Be Prepared to Ride Out the Ups and Downs – They’re All Part of the Game
The risk with long-term investments is that they can fall in value at any given time. They are, of course, equity investments, and have no guarantee of principal.
But because you’re holding them for the long term, they’ll have a chance to recover. That stacks the deck in your favor. Though an investment may be down 20% over the next five years, it could double or triple in value – or more – in the next 10.
That’s why you have to think long-term – to give yourself a chance to overcome the short-term dips, in favor of longer-term returns.
You also need to do it to maximize investment returns. Rather than selling a stock that has a 50% gain in five years, you should instead hold on longer, to get 100%, 200% or more.
Those are the kinds of returns you can expect when you become a long-term investor. And there are plenty of investments out there that can make that happen.
There are different types of asset classes, with different levels of risk. Since there’s no way to know for sure which will perform the best, or avoid dips in the near-term, the best strategy is to invest in all at the same time.
Before we get started, a quick note: Investing is an important yet complex practice that is just as much an art as it is a science. If you are interseted in seriously investing, it may be a good idea to use a tool like SmartAsset to help you find a Financial Advisor.
Here are the best long-term investments, and where to invest in them to get the best possible returns.
In a lot of ways, stocks are the primary long-term investment. They have the following advantages:
- They’re “paper” investments, which means you don’t have to manage a property or a business.
- They represent ownership in profit-generating companies. In a real way, investing in stocks is investing in the economy.
- Stocks can rise in value, often spectacularly over the long-term.
- Many stocks pay dividends, providing you with steady income.
- Most stocks are very liquid, enabling you to buy and sell them quickly and easily.
- You can spread your investment portfolio across dozens of different companies and industries.
- You can invest across international borders.
The many benefits of investing in stocks haven’t been lost on investors. The average annual return on stocks, based on the S&P 500, is on the order of 10% per year.
That includes both capital gains and dividend income.
And when you consider that it’s the return on investment over something close to 100 years, it means it has produced those returns in spite of wars, depressions, recessions, and several stock market crashes.
For that reason, nearly every investor should have at least some of his or her portfolio invested in stocks. Though some investors are active traders, and there are even some who engage in day trading, a buy-and-hold strategy over many years tends to produce the most consistent results.
There are two very broad categories of stocks you might be interested in growth stocks and high dividend stocks.
These are stocks of companies with the primary attraction of long-term growth.
They often pay no dividends at all, and even if they do they’re very small. Companies with growth stocks primarily reinvest profits in growth, rather than paying dividends to stockholders.
The returns on growth stocks can be dramatic. Apple stock is an excellent example. As recently as 1990, it could have been purchased for less than $1. But as of today, Apple is trading at about $208 per share.
Had you invested $1,000 in the stock in 1990, you now have about $208,000!
Of course, Apple is an example of a classic successful growth stock. There are other success stories, but there are at least an equal number of growth stocks that never go anywhere.
And even among the success stories, there’s often a lot of volatility. A stock that rises by 100-fold could experience wild swings in both directions along the way.
High Dividend Stocks
Much the opposite of growth-oriented companies, high dividend stocks are issued by companies that return a substantial amount of net profits to shareholders.
From an investor standpoint, high dividend stocks often pay yields higher than fixed-income investments.
For example, while the current yield on a 10 year US Treasury Note is 2.79%, high dividend stocks often pay more than 3% per year.
This isn’t a recommendation of any of these stocks, but more of an example of the kinds of dividend yields that are available.
High dividend stocks have another advantage. Since they’re stocks, they also have the prospect of capital appreciation. An annual dividend yield of 4% or 5%, plus 5% to 10% per year in capital appreciation, could produce one of the best long-term investments possible.
In fact, some investors prefer high dividend stocks. The dividend paid often makes the stock less volatile than pure growth stocks. There’s even some evidence that high dividend yields provide some insulation against downturns in the general stock market.
But high dividend stocks aren’t without risks either. A decline in earnings could make it difficult for a company to pay dividends.
It’s not unusual for companies to either reduce or eliminate their dividend completely. As you might expect, the stock price can collapse when they do.
The best way to buy individual stocks is through a large, diversified low-cost investment broker. They offer the best combination of investment options, investor information, and low (or no) trading fees.
Here are some of the possibilities:
2. Long-term Bonds – Sometimes!
Long-term bonds are interest-bearing securities with terms greater than 10 years. The most frequent terms are 20 years and 30 years.
There are different types of long-term bonds, including corporate, government, municipal and international bonds.
The primary attraction of bonds is usually the interest rate. Since they’re long-term in nature, they usually pay higher yields than shorter-term interest-bearing securities.
For example, while the yield on the US 5-year Treasury Note is currently 2.61%, the return on the US 30-year Treasury Bond is 3.03%. The higher yield is to compensate investors for the greater risks involved in longer-term securities.
The biggest risk to bonds is that interest rates will rise. Let’s say you purchase a 30-year US Treasury bond with a 3% yield in 2018. But by 2020, the yield on similar securities is 5%.
The risk is that you will be locked into the bond for another 28 years, at a below-market interest rate.
But that’s hardly the worst of it. Bond prices tend to move inverse to interest rates. That means when interest rates rise, the market value of the underlying bond declines.
In the example above, a $1,000 bond paying 3% – or $30 per year – would have to fall to $600 in order to produce a 5% yield, consistent with the new market conditions.
You’ll still get your full $1,000 face value on the bond if you hold it to maturity. But if you sell it at the discounted market price, you’ll lose money.
How Bonds can Become One of the Best Long-term Investments
If interest rates fall below the rate you purchase your bond at, the market value of the bond could rise.
Let’s use the same example as above, except that in 2020 interest rates on the 30-year bond have fallen to 2%.
Since your bond is yielding 3%, it may rise to a market value of $1,500, which would produce an effective yield of 2% ($30 divided by $1,500).
Now in all fairness to reality, that’s an unlikely scenario right now. Interest rates continue to be running at near record lows. For example, the 30-year US Treasury bond yielded over 15% back in 1981, and spent much of that decade in double digits.
The long-term average yield has been more in the 6% to 8% range. If that’s the case, declining interest rates from here looks pretty unlikely. But who knows?
Mutual Funds and Exchange Traded Funds (ETFs)
Mutual funds and exchange-traded funds aren’t actually investments themselves. Instead, they function as portfolios of a large number of different stocks and bonds.
Some are professionally managed, while others track popular market indexes.
But because of that diversification and management, each can be one of the best long-term investments available.
Funds are particularly valuable for people who want to invest but don’t know much about the process. All you need to do is allocate a certain amount of your investment capital into one or more funds, and the money will be invested for you.
Also, most people who invest in individual stocks and bonds don’t perform as well as funds do.
Funds offer advantages beyond investment management. You can use funds to invest in the financial markets virtually any way you want.
For example, if you want to invest in the general market, you can choose a fund that’s based on a broad index, like the S&P 500. Funds can also invest in either stocks or bonds.
Bonds are particularly well-suited to funds. As an individual investor, it may be difficult to diversify among a large number of bonds. Lots of investors don’t fully understand bond investing either. Using a fund for your bond allocation can give you a professionally managed, well-diversified bond allocation.
You can also invest in specific market sectors. That can include high-tech, where you choose a fund with that specialization. You can do the same thing with agriculture, energy, real estate, healthcare, or pharmaceuticals.
It’s even possible to invest in individual countries, or specific regions, such as Europe or Latin America.
In today’s investment environment, there’s a fund for just about any specialization. This makes it very easy for you to invest based on favored industries or geographic locations.
3. Mutual Funds
Mutual funds generally fall into the category of actively managed funds. That means the purpose of the fund isn’t to simply match the underlying market index, but to outperform it.
For example, rather than investing in all the stocks in the S&P 500, a fund manager may choose the 20, 30 or 50 stocks he or she believes to have the best future prospects.
The same is true within industry sectors. Though there may be 100 companies engaged in a specific industry, the fund manager may choose 20 or 30 he or she believes to be the most promising.
The fund manager may use various criteria to determine the top performers – it all depends on the purpose of the fund.
For example, some funds may favor revenue or earnings growth. Others may look for value – investing in stocks that are fundamentally strong, but are selling below those of competitors in the same industry.
Mutual fund managers have varying degrees of success at active management. In fact, most don’t outperform the market. Only about 22% of mutual funds outperform for as long as five years.
ETFs are set up similar to mutual funds, in that they represent a portfolio of stocks, bonds or other investments.
But unlike mutual funds, ETF’s are passively managed. That means that rather than specific securities being selected within the fund, it instead invests in an underlying index.
The most common is the S&P 500. That gives the fund full exposure to the US large-cap market.
And since it includes the largest companies in virtually every industry, all major industry sectors will be included.
ETFs can also invest in mid-cap and small-cap stocks, based on indexes that represent those markets.
In each case, the ETF attempts to closely match allocations in the underlying index. This includes not only the number of stocks in the index, but also matching the percentage representation in the index of each security.
The limitation of ETF’s is that they merely seek to match the performance of the underlying index, not to exceed it.
But ETFs are generally lower cost than mutual funds. For example, a lot of mutual funds charge load fees of between 1% and 3% of your investment. ETF don’t charge load fees.
The primary trading fee on ETF’s is the broker commission. That’s usually comparable to stocks, and runs between $5 and $10 at major discount brokerage firms.
The specific market exposure, combined with low trading costs, makes ETFs perfect if you’re mostly concerned about creating a well-balanced portfolio allocation.
And since they can be purchased on a per share basis, they require a lot less investment capital than mutual funds, that typically require a flat dollar amount investment, say $3,000 or more.
5. Real Estate
Real estate is frequently mentioned as an alternative to stocks as the best long-term investment. That’s because real estate has produced similar returns to stocks, at least since World War II.
The most basic way to invest in real estate is by owning your own home. Unlike other investments, real estate can be heavily leveraged, particularly if you’re an owner occupant.
For example, it’s possible to buy an owner-occupied home with as little as 3% down.
That would give you the ability to purchase a $200,000 house with just $6,000 for the down payment.
That doesn’t even count the fact that the mortgage on the property will be more than half paid after 20 years.
And don’t forget – while the house is rising in value, providing an incredible investment return, it will also be providing shelter for you and your family.
Investing in Rental Real Estate
This is the next step up from owning your own home. It’s more complicated than an owner-occupied house because buying it has to make sense from an investment standpoint.
For example, the purchase price and carrying costs have to be low enough to be covered by the monthly rent payment.
Another complication is that investment property has to be managed. But you can hire a professional real estate management company to do that for you – at a fee.
Still another issue is the down payment requirement. While you might be able to purchase an owner-occupied home with 3% down, an investment property will usually require a minimum of 20%.
If the purchase price of the property is $200,000, you’ll need to come up with $40,000 upfront.
There are two ways to make money investing in rental real estate:
- Rental income, and
- Capital appreciation.
In most markets today, it’s very difficult to buy a rental property that will reduce a positive cash flow at the very beginning. Breaking even is a more realistic goal.
But as the years pass, and rents rise, you’ll begin to make a profit. This will produce a monthly income.
Best of all, once your mortgage is paid for, the positive cash flow will increase dramatically.
But it’s more likely most rental real estate is purchased for capital appreciation. It works the same as it does for an owner-occupied property.
For example, if you make a 20% down payment ($40,000) on a $200,000 property, and it doubles in value in 20 years, you’ll have a $200,000 return on a $40,000 upfront investment.
And once again, after 20 years, the mortgage on the property will be more than half paid.
Rental real estate is one of the very best long-term investments.
Real Estate Investment Trusts
If you want to own real estate over and above an owner-occupied home, or if you don’t want to take on the complication of rental real estate, there is a third option. You can invest in real estate investment trusts, or REITs for short.
The advantage with REITs is that you can invest in them the same way you do with stocks. You buy into the trust, and participate in the ownership and profits of the underlying real estate.
The return on REITs generally comes from either mortgage financing or equity ownership. Where equity is involved, properties are usually commercial in nature.
This can include office, retail, warehouse or industrial space, or large apartment complexes. It’s an opportunity to invest in commercial real estate with a relatively small amount of money, and the benefit of professional management.
What’s more, you can buy or sell your REIT position anytime you like.
REITs function something like very high dividend paying stocks. This is because at least 90% of their income must be returned to investors in the form of dividends.
That can make it one of the highest yielding investments you can have.
Given the income and performance history of REITs, they can be one of the best long-term investments in a well-balanced portfolio.
Real Estate Crowdfunding
Real estate crowdfunding is still another way to invest in real estate – without getting your hands dirty! It’s much like peer-to-peer lending, except it’s focused on real estate.
It mostly involves commercial real estate, but crowdfunding platforms give you the ability to choose just about any method for investing in property.
Unlike REITs, real estate crowdfunding gives you an opportunity to select the specific real estate investments you want to participate in. You can also choose the amount of your investment, though that can be as little as $1,000.
One of the best real estate crowdfunding platforms is Fundrise.
You can invest on this platform with as little as $500, and average returns are running between 12% and 14% per year.
The one of the biggest advantages with Fundrise is that you don’t have to be an accredited investor.
That’s a requirement with most real estate crowdfunding platforms, and it essentially requires that you be a high income/high asset investor. Other real estate crowdfunding platforms worth checking out include Realty Mogul, RealtyShares, and Peerstreet.
Just be aware that most real estate crowdfunding platforms do require you to be an accredited investor (high income/high net worth), and won’t be available to the average investor.
But that’s also why I like Fundrise, since they don’t have that requirement.
6. Tax Sheltered Retirement Plans
These aren’t actual investments, but they add an important dimension to any investment strategy. When you hold investments in tax-sheltered retirement plans, you get important tax benefits.
First and foremost is the tax deductibility of your contributions. But even more important is tax deferral of investment earnings.
It means your investments can earn income and capital appreciation year after year, without immediate tax consequences. Funds become taxable only when they are withdrawn from the plan.
For example, let’s say you invest $10,000 in the taxable account, with an average annual return on investment of 10%. If you’re in the 30% tax bracket, your after-tax return on investment will be just 7%.
After 30 years, the account will grow to $76,125.
If the same $10,000 is invested in a tax-sheltered retirement plan, with an average annual return on investment of 10%, there will be no immediate tax consequences.
After 30 years, your investment will grow to $174,491.
You’ll earn an extra $98,000 just for having your investments parked in a tax-sheltered retirement plan!
That’s why no discussion of the best long-term investments is possible without considering tax-sheltered retirement plans.
You should take advantage of any accounts available to you, including:
Any of these accounts should be a priority for holding long-term investments.
The Roth IRA deserves a special mention.
That’s because it offers tax-free income in retirement. That’s right – tax-free, and not just tax-deferred.
With the Roth, as long as you are at least 59 ½ years old when you begin taking distributions, and you have been in the plan for at least five years, any withdrawals you make are tax-free.
And since you may have more income in retirement than you think, having at least some of it coming from Roth IRA is a brilliant strategy. Some people get confused about Roth IRAs because of the word “IRA”.
They might confuse them with traditional IRAs.
But while there are similarities, there are a lot of differences between Roth and traditional IRAs. I love Roth IRAs, and once you learn more about them, you’ll want to start one right away.
This is another important consideration when investing, particularly if you’re new at it and don’t know how to do it successfully. Robo-advisors have come up fast in less than a decade, and are attracting investors at all levels of experience.
The reason is because robo-advisors handle all the investing for you.
All you need to do is fund your account, and the platform will create and manage your portfolio. That includes reinvesting dividends and rebalancing as necessary.
Many even offer special services, like tax-loss harvesting.
They construct a portfolio of both stocks and bonds, using low-cost ETFs. But some also invest in alternatives, like real estate and precious metals. You can find a robo-advisor covering just about any investment angle you can think of.
Some of the robo-advisors we like include:
If you’d like to begin investing, but you don’t know how, robo-advisors are an outstanding way to start.
- Quick Look
- Commissions: $0 per trade or $9.95 for mutual funds
- $0 account minimum
- Browser-based platform with an impressive suite of tools
- DIY investing or professionally managed portfolio, your choice
I have to confess from the start that I have very mixed feelings about annuities.
Some annuities are solid investments, but others are best avoided completely. Annuities are less of an investment, and more of an investment contract you make with an insurance company.
You put up a certain amount of money, either upfront, or over a specific amount of time. In exchange, the insurance company will provide you with a specific income. That term could either be a fixed number of years, or for life.
That all sounds good, but what I don’t like is the fine print.
Since their contracts, annuities come with a lot of details, and some of them aren’t so pretty.
For example, while a lifetime annuity will pay you an income even if your investment is exhausted, should you die before that happens, the remaining balance reverts to the insurance company.
So for example, if you begin taking income payments at 65, and you live to be 95, you win. But if you diet 75, you lose. Or at least your heirs will.
Most annuities are not good investments. Variable annuities come to mind quickly. They invest in insurance company-sponsored mutual funds, which are usually not as good as the ones you can pick for yourself.
Insurance agents often make a hard push for these annuities, which should be a warning in itself.
Good Annuities worth Considering
But there are a few that are worthy of consideration as long-term investments.
One is the Fixed Indexed Annuity.
What I like about this one is that there truly safe – the value can only go up, not down.
Another that I like are Fixed Annuities.
They’re good for retirees because they work much like CDs. You invest money, and you’re paid a fixed rate of interest that’s guaranteed and tax-deferred. They can be set up to provide you with an income for life.
And still, another is Deferred Income Annuities.
These work much like an IRA. In that, you invest money for a time, accumulate investment income on it, and later distributed as a guaranteed lifetime income. These also come with a guaranteed interest rate.
They’re an excellent choice if you’re not covered by a traditional pension plan.
Final Thoughts on the Best Long-term Investments
There’s something of an ongoing debate between which is the best long-term investment – stocks, bonds, or real estate. But from an investment standpoint, it’s a debate that’s probably not worth spending too much time on.
The best course of action is usually to put some money into each of the three.
Different investment assets outperform others in different financial markets. Stocks may be the primary investment today, but real estate might take its place in a few years, and bonds after that.
Focus less on which asset class you should favor, and more about achieving a solid allocation between the three.
Since we can’t know what the future holds, and how investments will perform, the best strategy is to be invested in all three, at all times.