What are Long Term Investments – Your Complete Guide to Long Term Investing
Long term investment options fascinate and attract many, if not all, investors. The most attractive feature of these investment options is that they often offer some of the highest returns in the investing world.
Long term bonds, for example, generally offer higher returns than bonds that have shorter periods of maturity. Similarly, term deposit accounts with longer terms often offer higher rates of interest. Thus, long term investment options are often a preferred choice for investors. Even those investors who normally (or mostly) invest only in short-term investment options may try to allocate a part of their funds to longer-term investments in order to benefit from the higher returns available.
Long term investments may also carry certain tax incentives. Gains from short-term investments are often taxed at the highest rate (or at a comparatively high rate) whereas certain long term investments may not be taxed at all or may be taxed at lower rates. Governments often offer tax rebates on longer-term investments in order to encourage such investments. The reason for this is that such investments may lead to greater economic activity in the country, greater economic growth, etc.
If you are fascinated by long term investments, then you have come to the right place. In this article, we will quickly and simply tell you everything about what is a long term investment, how to invest long term, etc.
Common Long Term Investment Options
In general, any investment that is made for a period longer than 1 year is considered a long term investment. Thus, a wide range of investment options are categorized as long term investments. Let us now look at some of the most popular long term investment options.
Investing in the share market is one of the most common (popular) long term investment options. Many of us have heard tales of early investors in companies like Apple, Microsoft, etc. becoming millionaires once these companies established themselves. While some equity investors may have a short-term investment horizon (they may buy some stock with the intention of selling it within a year), most experts suggest that investment in the stock markets should be made with an investment horizon of at least 5 to 10 years. The reason for this is that in the short term there may be fluctuations in the market which may lead to lower returns (or even losses in some cases).
In the longer term, well-managed companies are expected to yield good returns – it is believed that short-term fluctuations would not have much long term impact on the share performance (stock market performance) of good companies. Thus, equity investment is a highly preferred option for long term investment.
While equity investments can certainly yield high returns, another attractive feature of equity is that it offers investors a lot of flexibility. Thus, investors with many different types of investment goals find that equity can play an important role in their investment portfolio. Accordingly, investors apply many different types of strategies when investing in equity. Let us quickly take a look at some of these strategies.
First of all, most investors purchase shares of a company with the expectation that the shares would gain in value over a period of time. Thus, selling off the shares at a later stage is expected to yield profits. Additionally, profitable companies often pay dividends to shareholders. These dividends can be an additional source of income (and gains). Thus, many investors looking for fixed income from their investments also purchase shares.
Many investors search for under-priced shares in mature industries (older industries). Such companies (and industries) may not see a lot of rapid growth – i.e., growth in the short term. But, over the longer term, these stocks are expected to gain in value and yield good profits. Investors who follow this strategy may often have an investment horizon of up to 10 years or even longer. Many legendary investors swear by this method of investing and attribute their success in the world of investments to this strategy.
A lot of investors look for quicker returns in the equity markets. Such investors often invest in new companies in sunshine industries – industries that are relatively new and are expected to perform well in the near future. (For example, some information technology companies can be said to be a part of sunshine industries.) In many cases, such investors may buy shares of a company even if the company is loss-making. In such cases, investors expect that the company would become profitable in the near future or would be able to raise more money in the near future and hence, would continue to grow rapidly till it becomes profitable.
Some equity market investors only invest in shares of larger companies. These companies are believed to be well-established (and safe), with a management team that has proven itself. It is expected that such companies may offer somewhat lower returns. However, they are seen as safe investments and hence, are considered a good option for investors looking to safeguard their capital.
Many equity market investors seek to invest in well-managed smaller companies (such investors may stay away from large, well-established companies or may allocate only a small part of their investment portfolio to such companies). Such investors expect that smaller companies are likely to grow faster than larger companies. Thus, they expect that these companies may yield higher returns (and may outperform market indices).
Finally, mutual funds offer another good way of investing in stock markets. Such funds typically invest in shares of many different companies. Mutual funds again offer a lot of flexibility to investors. Some mutual funds invest only in larger companies while others invest only in smaller companies. Some mutual funds invest only in particular sectors (i.e., particular industries) while others may target a select group of industries. Some mutual funds may target safe stocks while other funds target stocks that are expected to yield higher returns. There are also some mutual funds that invest in a group of funds. Mutual funds are professionally managed and hence, make it easier for investors to benefit from the equity market.
These too are a very popular investment option among long term investors. A bond is essentially a lending instrument. When you purchase a bond, the purchase price is the amount that you lend to the issuer of the bond. In turn, the issuer of the bond pays you some predetermined rate of interest on this sum. Bonds have a fixed period of maturity – at the end of the period of maturity, the issuer of the bond repays the original sum that you had paid to purchase the bond. Do note that bonds may be issued by the central government (union or federal government) or by local government bodies or by corporate entities.
Bonds typically offer greater security than shares. Correspondingly, they may offer lower returns. Do note though that bonds also offer a lot of flexibility – there are many different types of bonds available. Thus, there are many bonds which offer less security and much higher returns. Hence, bonds can appeal to investors who are looking to safeguard their capital and can also appeal to investors looking for higher returns. Similarly, different bonds carry different periods of maturity. Common bonds may have periods of maturity of up to 30 years. Thus, bonds also appeal to investors with different investment horizons.
Do note that many bonds can also be traded in various markets. Thus, bonds need not only be a source of fixed income – selling a bond in the markets may also fetch a profit. Further, just as in the case of shares, there are many professionally-managed funds that invest in bonds. Different funds that invest in bonds often have very different goals. Some funds invest only in safer bonds while others invest in a mix of safer bonds and riskier bonds (higher return bonds). Some funds invest only in bonds while others invest in a mix of instruments, including bonds. Thus, funds investing in bonds offer a lot of choice to investors.
Many long term investors (especially those with larger portfolios) include real estate in their investment portfolio. Real estate investment is typically recommended for investors with longer investment horizon. Such investors often invest in property in bigger towns and cities. Properties in such towns and cities typically generate good amount of rental income (which serves as a fixed income source). Such properties are also expected to offer good appreciation in value in the long term.
Alternatively, some real estate investors look to invest in upcoming towns and cities or in new projects. Such investors often expect their investment to yield quick returns (i.e., appreciation in value in a shorter investment horizon, typically between 2 to 5 years). Some investors interested in real estate may not invest in property at all – rather, they may invest in shares of real estate companies. Similarly, there are often professionally managed funds that invest in a group of projects or in shares of a group of real estate companies. Instead of directly investing in real estate, investors may invest in such funds as well.
These are some of the most common long term investment options. You have now understood these options and have seen how to invest profitably in these. You are now ready to analyse your investment goals, identify which of these is most well-suited to your goals and then make your investment decisions.