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If you want to secure your financial future, the best thing to do is to invest for the long term.
Nowadays, investors can choose from a variety of ways to grow their wealth, such as certificates of deposit (CDs), stocks, mutual funds, and ETFs. Put a little bit into everything to diversify your portfolio and ensure that your money will fare well in just about any investment environment.
Top Long-Term Investments At-A-Glance
Growth Stocks
In short: Growth stocks, often tech companies, promise high growth and investment returns. In general, all profits are reinvested back into the business, so don’t expect dividend payouts, at least not until their growth eases.
Best for: Those who don’t mind the time-consuming process of analyzing the company carefully, those who are tolerant of high risk, and those who can commit to holding stocks for 3 to 5 years.
Risks: These stocks are considered high risk because investors pay more for the stock than what the company is earning. If a recession hits (a bear market), these stocks can devalue quickly. That said, growth stocks often perform very well over time.
Rewards: The reward is exponential if you find the right company and invest at the right time.
Get them at: Any online broker that provides stock trading.
READ MORE: See The Best Online Stock Brokers Here
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Stock Funds
In short: Stock funds are collections of stocks that are derived by fund companies and often have a particular theme or category in common, such as large stocks or American stocks. Usually, fund companies charge a low fee for their stock fund product.
Best for: Those who want to invest aggressively, but don’t have the time or effort to analyze individual stocks.
Risks: Stock funds are less risky than individual stocks, and they require less work as well. That said, they can lose up to 30% and gain up to 30% in an extreme year. Keep in mind, if you purchase a fund based on one industry, your fund will be less diversified. For example, an automotive fund will likely take a hit if oil prices increase.
Rewards: Investors who purchase a stock fund get the weighted average return of all the companies in the fund, so your returns are more stable than if you held a handful of individual stocks.
Get them at: Any online broker that provides ETF and mutual funds.
Bond Funds
In short: Comprised of many bonds from a range of issuers, bond funds are often categorized by the type of bond in the fund, such as duration, riskiness, or issuer (corporate, municipality or federal government). The issuer agrees to pay the bond’s owner a predetermined amount of interest every year. When the bond term ends, the issuer repays the principal amount of the bond.
Best for: Those who want a diversified portfolio of bonds without having to analyze and purchase individual bonds, and those who don’t want to throw down close to $1,000 for a single bond. Bond ETFs can cost less than $100.
Risks: Individual bonds can fluctuate greatly, whereas bond funds stay relatively stable. That said, bond funds may rise and fall with the prevailing interest rate. In general, bonds are safe when compared to stocks, but not all issuers are created equal. Government issuers are quite safe, and corporate issuers can be riskier.
Rewards: Individual bonds are generally safe investments, and bond funds are even safer as they are diversified, reducing the impact on the portfolio if one bond defaults. Bond funds often pay out 4% to 5% annually.
Get them at: Any online broker that provides ETF and mutual funds
READ MORE: Worthy Bonds Bonus: Free $10 Bond & $10 Referrals
Dividend Stocks
In short: A stock that pays a dividend, a regular cash payout, is a dividend stock. These are often found with older companies that don’t have a great need for their cash, like REITs. They produce regular income and, in the best-case scenario, grow that dividend over time, so you end up with better returns than bonds that offer a fixed payout.
Best for: Those who plan to hold their investments in the long term, those who want below-average volatility, and those who are looking for a cash payout.
Risks: Compared to growth stocks, dividend stocks are usually less volatile because they are often established companies. That said, they can still rise and fall greatly with the stock market. Be aware if the company doesn’t earn enough to pay the dividend, it will not pay out, and the stock will fall dramatically.
Rewards: Most people are attracted to dividend stocks for their payouts. At the high end, some companies pay 4% or more annually. More importantly, they can raise their payouts upwards of 10% a year over a long period of time. So, in essence, you’ll get a raise every year.
Get them at: Any online broker that provides stock trading.
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Value Stocks
In short: Purchasing value stocks is a defensive maneuver when the market runs up greatly and valuations on a lot of stocks are stretched. During this time, value stocks may earn lucrative returns, because they often appear cheaper when considering price-earnings ratio, or how much investors are paying for every dollar of earnings, and other valuation metrics.
Best for: When interest rates are rising.
Risks: Value stocks usually have less risk, because they tend to fall less when the market falls. Similarly, they can rise if the market rises.
Rewards: Value stocks can rise quickly, compared to other non-value stocks. Their valuations increase if the market favors them so you can get better-than-average returns with less risk. Value stocks may also pay dividends, so investors can profit from cash payouts as well.
Get them at: Any online broker that provides stock trading.
READ MORE: Best Short-Term Investments of January 2023 – Savings, CDs, Bonds
Target-Date Funds
In short: Target-date funds are more conservative as you get older, so the portfolio is less risky as the investor nears retirement when money is needed. These slowly adjust investments from aggressive stocks to conservative bonds as the target date approaches.
Best for: Workplace 401(k) plans, and those who want to invest towards retirement.
Risks: Many target-date funds are a combination of a stock fund and bond fund, and so carry the same risks. The fund will own a higher number of stocks if the target date is decades away, meaning it will be more volatile. As the fund nears the target date, it will own more bonds and fluctuate less. Return is sacrificed for safety, but bonds don’t yield much nowadays, so investors run the risk of outliving their money.
Rewards: Financial advisors often recommend purchasing a fund with a target date of 5 to 10 years after retirement, so investors get more return from stocks.
Get them at: Any online broker that provides ETF and mutual funds.
READ MORE: Seeking Alpha Limited-Time Discount Offer
Real Estate
In short: The quintessential long-term investment, real estate investment requires a large number of funds, high commissions, and long-term commitment. That said, smart investors will borrow from the bank to cover most of the investment, and then pay it back over a period of time.
Best for: Those who want to call the shots, those that don’t mind actively managing the property, and those that want to benefit from property tax laws.
Risks: Borrowing a large amount of money is not for everyone, and purchasing real estate with your savings means your funds are going into only one asset. You’ll be in big trouble if something should happen to the asset. For example, not being able to find a tenant for the property and paying for the mortgage and upkeep costs out of pocket.
Rewards: High risk often comes with high rewards, optimally. Put yourself in a good position by selecting a good property and managing it well. Holding onto the asset and paying off the mortgage can yield very attractive returns.
Get them at: An accredited real estate broker.
READ MORE: See The Best Real Estate Promotions Here
Robo-Advisor Portfolio
In short: A robo-advisor automatically invests your funds based on your goals, risk tolerance, and length of the investment. Simply answer questionnaires and deposit money into the investment account, and the robo-advisor will pick funds, often low-cost ETFs, for your portfolio. Typically a robo-advisor charges 0.25% annually, on top of the cost of the funds in the portfolio. A good robo-advisor will build a diversified portfolio that meets your long-term financial goals.
Best for: Those who don’t have the time and effort to analyze individual stocks, and those who want a hands-off approach.
Risks: The risks of a robo-advisor portfolio depend on the risk tolerance you submitted in the account-opening questionnaire. It can be as conservative or aggressive as you want.
Rewards: This also depends on the type of investments in your portfolio and can range from very high for funds with mostly stock to low for cash or high-yield savings accounts.
Get them at: Any robo-advisor online.
READ MORE: See The Best Robo-Advisor Promotions Here
Roth IRA
In short: A Roth IRA is a brokerage account with tax benefits. It’s a great investment, compared to a traditional IRA, because it saves after-tax money, grows your money tax-free, withdraws it tax-free, and passes the money to your heirs tax-free.
Best for: Those who earn income and want to grow tax-free assets for retirement.
Risks: You choose your investments with an IRA. If your chosen investments don’t perform well, or if they don’t align with your financial goals, you could suffer financial losses. Also, if you don’t use the Roth IRA according to IRS rules, you could be subject to penalties.
Rewards: Roth IRAs allow you to invest in stocks and stock funds, and enjoy their potentially higher returns, tax-free.
Get them at: Any brokerage or robo-advisor.
Long-Term Investing 101
Keep these rules in mind when you invest your money long-term to secure your financial future.
Understand Investment Risk
As we said before, high risk often goes hand-in-hand with high rewards. That also means safer investments don’t offer as much in return. Stocks, in particular, are infamous for their unpredictability, going up or down as much as 50% in just one year.
Stick to Your Strategy
To create a good strategy, you must first know your risk tolerance. It’s important not to jump ship, selling an investment when it’s down if there’s still a possibility for it to rise. Understand your investment strategy inside and out. Doing so will better your chances of sticking with it, even when it seems like things aren’t going well.
No strategy is 100% bulletproof, so it’s essential to focus on the distant future, instead of the moment, and stick to your strategy.
Know Your Time Commitment
Holding onto your investments longer lowers your risk, because it gives you ample time to ride out the highs and lows of the market. The S&P 500 is a great example. Those who invest for the long term also don’t have to worry about tracking their investments or short-term moves.
Investors should commit to holding their investments for 3 to 5 years at a minimum. If that’s not possible, put your funds in a high-yield savings account instead.
Diversify Your Investments
Because investment strategies are not bulletproof, it’s important to diversify your portfolio to reduce your risk and earn solid returns over the long run. Index funds are an easy and cost-effective way to diversify your investments.
Dollar-Cost Averaging
You don’t want to invest all your funds at once, as the market can fluctuate greatly in the short term. Instead, invest every week or every month, and keep adding funds over time. This strategy is known as dollar-cost averaging, protecting you from purchasing stocks at a high price.
Regularly investing in your 401(k) account sponsored by your employer is a good example of dollar-cost averaging, because you are contributing funds with each paycheck.
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Bottom Line
One of the best ways to build wealth over time is to invest for the long term. Keep your focus on the long run and avoid constantly tracking the market’s daily movements.
If you’re thinking of starting your journey into investing, see our review of the best online brokers. If you’re looking for a professional to handle your investments, consider a top robo-advisor like Wealthfront or Betterment.
READ MORE: See The Best Bank Promotions Here And The Best Investing Promotions Here
