The benefits of long-term investing

Long-term investing is one of the most effective ways to grow your wealth, but it requires a great degree of patience and consistency. In this article, we discuss how long-term investing works, the benefits of long-term investing, popular long-term investment strategies, and how long-term investing compares to short-term investments.

Definition of long-term investing

What is long-term investing?

Long-term investing refers to holding an investment for an extended period of time. Depending on the type of asset, the time horizon can be anywhere from one year to 30 years or more, but there’s no strict definition. For example, holding a position for a few weeks in the forex market might be considered long term, while in the stock market it often implies holding securities for years.

The goal of long-term investing is often tied to a financial milestone like building a retirement fund, saving for a child’s education, or growing wealth for future generations. When the time horizon is measured in decades, investors can ride out short-term market volatility to potentially benefit from broader upward trends in financial markets.

Long-term investments

1. Stocks

The stock market has historically delivered strong returns over long periods. Whether you choose to invest in dividend stocks, growth stocks, value stocks, or a stock fund, stocks offer the potential for significant growth over time.

2. Mutual funds and ETFs

Mutual funds and exchange-traded funds (ETFs) allow you to easily diversify across many stocks or bonds with a single investment. Index funds, which aim to replicate the performance of a market index like the S&P 500, are often considered to be amongst the best long-term investments because of their low costs and broad diversification.

3. Bonds

Bonds are fixed-income securities where investors lend money to governments or corporations in exchange for regular interest payments. Common examples include government bonds, corporate bonds, or municipal bonds. Although bonds generally offer lower returns than stocks, they can provide greater stability and an additional income.

4. Real estate

Real estate is a classic example of a long-term investment. You can invest in real estate either by directly owning property or through a real estate investment trust (REIT) which can be bought or sold like a stock or mutual fund. Both options provide income and potential for price appreciation over time, but directly owning a property is a bit more hands-on and requires active management if you’re renting it out to a tenant.

5. Target-date funds

Target-date funds are a popular option for investors who have a fixed long-term date in mind, such as retirement or college savings. These set-it-and-forget-it funds automatically rebalance over time, starting off with higher-risk assets for growth then gradually shifting towards lower risk investments the closer you get to your target date.

6. Robo-advisors

Robo-advisors aren’t exactly an investment but more of a way to invest. These use algorithms to create and manage a diversified investment portfolio based on your risk tolerance, goals, and time horizon. Many robo-advisors invest in low-cost ETFs and will automatically rebalance your portfolio as needed. If your money is in a taxable account, they’ll also perform tax-loss harvesting to lower your tax bill.

7. Long-term CDs

Certificates of deposit (CDs) offer a guaranteed return over a fixed term, often ranging from three months to five years or more. CDs are a popular investment option for investors who don’t need to access their money for a set period of time and offer higher interest rates compared to a traditional savings account. The longer the term, the higher the interest rate.

They’re less liquid and offer less returns compared to stocks or real estates, but they’re a low-risk investment that can be rewarding in a declining interest rate environment.

What securities are best to invest in long term?

The best securities to invest in for the long term are those that:

• Offer the potential for steady growth
• Generate income
• Preserve capital across different market cycles.

With that in mind, most long-term investors tend to favor stocks, ETFs, commodities (e.g. gold), and bonds.

Long-term investment strategies

There’s a bit more to long-term investing than simply choosing an asset and holding it. Below, we share some long-term investment strategies to help you build a solid plan for your future.

Essential rules for long-term investing

Four essential rules to keep in mind when building a long-term investment strategy are:

Understand the risks of your investments

To get a higher return in investing, you often need to take on more risk. This means that:

• Safe investments, like CDs, offer lower yields
• Medium-risk assets, like bonds, offer moderate returns
• High-risk stocks offer the highest returns but at the cost of greater volatility.

For example, some individual stocks can rise or fall by 50% within a single year. As a long-term investor, you must be prepared for this volatility and understand the risks associated with each asset class.

Pick a strategy you can stick with

Choosing a strategy that matches your risk tolerance is essential. It’s inevitable that your long-term investment will face periods of decline, and to be successful, you need to stay committed. That means no panic selling during a downturn!

Make sure you understand how your investment strategy works so you can stick with it when markets are volatile. No strategy is going to perform well 100% of the time, so you need to stay patient and consistent. There’s nothing worse than selling off an investment in a panic only to see it bounce back and generate even higher returns than before.

Know your time horizon

Holding your investments for a longer period of time can be a way to manage risk. A longer time horizon gives your investments time to recover from short-term market fluctuations and smooths out volatility.

Ideally, money invested in the stock market should remain there for at least three to five years or even longer. By committing to a long-term approach, you can avoid reacting to daily market movements and take advantage of practices like dollar-cost averaging and reinvesting dividends.

Make sure your investments are diversified

As we mentioned earlier, no investment performs well 100% of the time. Diversification can help you manage risk by spreading investments across different classes, industries, and regions. Index funds and ETFs are an easy and cost-effective way to achieve a diversified portfolio.

Long-term investment strategies to consider

Now you know the essential rules to stick to, let’s dive into some long-term investment strategies:

Know where you plan to invest before choosing your tools

Before you start choosing investment products, take the time to define the financial goals they’re intended to serve. Do you want to buy a house in a few years, or are you investing for retirement in the long distance future? Each of these goals require different strategies.

Some goals call for conservative investments, like bonds or CDs, while others can benefit from more aggressive positions in small-cap or emerging market stocks. Thinking about each of your objectives can help you choose the right tools and strategies.

Know your investment risk tolerance

Risk tolerance defines how much volatility you can comfortably endure without making emotional decisions like panic-selling your portfolio. As we mentioned, it’s inevitable that you’ll experience some market downturns. Knowing your limits can help you stay invested during these periods so you can benefit from the eventual recovery – and maybe even take advantage of opportunities during periods of market stress.

Adjust your investment strategy whenever necessary

Even though long-term investing favors consistency, your strategy shouldn’t be too rigid. Markets and economic conditions evolve, and you might need to occasionally adjust your portfolio to make sure your investments remain aligned with your goals and risk tolerance.

Long-term investing vs. short-term trading

Finally, one way to understand long-term trading is to compare it to its opposite: short-term trading.

Long-term investing vs. short-term trading

Short-term trading involves opening and closing positions within hours, days, or weeks with the aim of capitalising on short-term price fluctuations. It tends to carry higher risks compared to long-term trading because you’re trying to predict short-term market swings before they happen. If your predictions are true, however, you can generate quicker returns.

So when should you use long-term or short-term trading?

• Long-term investing is ideal for building wealth gradually or saving for retirement or another financial goal. It’s suitable for investors who prefer a more hands-off approach and are comfortable riding out market fluctuations.
• Short-term trading, on the other hand, is more suited to investors who have the time and skills to monitor the markets quickly. It can offer quicker profits but requires more technical knowledge and a higher risk tolerance.

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