Benefits of Investing in Long Term Assets

Building an investment portfolio can mean many different things. You can invest in everything from stocks and bonds to real estate and commodities. There are also an array of strategies you can use when creating a portfolio. For instance, you might prefer investing in long-term assets that you'll hold for many years. Making long-term investments gives you certain advantages that can't be had with a short-term strategy. In this guide, you'll discover the many benefits of investing your money into long-term assets.

What are Long-term Investments?

Long-term investments involve assets that you hold onto for three years or more, the most common of which include real estate and stocks. Many types of long-term investments are relatively illiquid, which means that it's difficult to convert them into cash in a short period of time. These investments don't change with short-term market fluctuations, which makes them more stable opportunities for investors. 

Types of Long-term Investments

The various types of long-term investments that you can put your money towards include real estate, mutual funds, stocks, bonds, and ETFs. Stocks are securities that give you ownership in a specific company. When you purchase shares of stock, you'll have a claim on the earnings the company brings in. You might also have voting rights when it comes to future actions the company takes. 

Bonds are a type of fixed-income security that occurs as a loan that the investor makes to a government agency or company. While the investor holds onto corporate debt, they'll receive cash flow from the creditor. Bonds typically pay out a fixed interest amount on a quarterly or semi-annual basis. In most cases, bond prices are considerably more stable compared to stock prices, which is why they're often used to diversify portfolios. 

A mutual fund is a managed portfolio that can contain dozens of different securities, which include everything from stocks to bonds. If a single security performs poorly, the remaining securities could mitigate any losses. Mutual funds allow investors to keep risk low by placing their money towards numerous markets.

Exchange-traded funds (ETFs) are securities that combine specific characteristics of mutual funds and stocks. Like mutual funds, ETFs track performance for the benchmark index. However, they are also traded on exchanges like stocks. 

Real estate investments can involve commercial property, residential property, and land. These investments also take many forms. For instance, you could purchase a residential home or multifamily property on your own, which means that any income generated from the property would go directly to you. You could also choose to invest in an REIT, which is a company that owns numerous real estate properties. Since you would be one investor out of many, you could invest without paying a considerable sum of money.

Advantages of Investing in Long-term Assets

There are numerous advantages of investing in long-term assets, the primary of which is that you'll be able to better navigate market fluctuations without needing to worry about substantial hits to the value of your investment portfolio. 

Allows You to Navigate Market Fluctuations

If you haven't made any or many investments in the past, doing so can be a stressful experience when you're just getting started. Many people make the mistake of selling their investments at the first sign that losses are on the way. It's tempting to offload investments when economic conditions aren't great or a company you've invested in has a bad quarter. However, investments that perform poorly because of broader market conditions often rebound when the conditions improve.

Market volatility is normal and is mainly a problem when you're trying to make profits off of short-term investments. On the other hand, long-term assets allow you to better manage any market volatility that occurs. 

Gives You Access to Compound Returns

Among the best aspects of long-term investments is that you'll gain access to a compounding rate of interest. As long as you reinvest the returns you earn in a given year, you have the ability to increase your returns with each passing year. 

Let's say that you invest $20,000 and earn a 5% dividend on your investment. During the first year, you'll make $1,000, which you can put back into your fund as an additional investment. The interest you earn next year will include the initial $20,000 investment and the $1,000 return you gained this year, which means that you would earn $1,050 in total returns. 

While a $50 year-over-year gain isn't substantial, it adds up because of the compounded rate of interest. If this strategy is repeated over numerous years, your investment could pay high dividends. 

Long-term Investing is Simple and Straightforward

There's no need to have extensive trading skills if you want to invest in a long-term asset. The main skill that you should have is patience, which will make it easier for you to wait numerous years to cash out on your initial investment. You also need to have a comprehensive strategy on what returns you're looking for and when you want to exit the investment. 

Keep in mind that some long-term investments are passive ones, which means that you wouldn't need to actively manage any aspect of your investment. A common area of focus for passive investors is real estate. If you purchase a rental property, you can hire a property management firm to oversee the property for you. In this scenario, you'll earn passive income without needing to perform the day-to-day management tasks. 

Transaction Fees are Lower

If your portfolio is filled with long-term investments, you won't need to pay high transaction fees. The main expenses of investing in long-term assets include capital gains taxes and brokerage fees. As a long-term investor, transaction fees occur less frequently when compared to short-term investors who make new investments on a regular basis. 

You have Less Tax Liability

You'll also benefit from paying much less taxes in comparison to active traders. A short-term investor who holds their investment for less than one year will pay tax at the highest marginal tax rate that they fall under, which can be anywhere from 10% to just under 40%. 

Capital gains taxes that are owed on long-term investments can be 0%, 15%, or 20% depending on the amount of income you bring in, which means that your final tax bill can be significantly lower. 

Investment Risk Remains Relatively Low

Investing over a lengthy period of time should also reduce the amount of risk you add to your portfolio by getting rid of missed opportunities. While short-term investments have the potential to be highly lucrative, you also need to attempt to time the market perfectly. This technique results in sizable misses if you don't buy or sell at the right time. Long-term investments don't correlate with the volatility of the market at the same level. 

J.P. Morgan Asset Management conducted a study on the S&P 500 between 1994-2014. During this 20-year period, people who remained invested would have received a 483% return on their initial investment. If you missed out on the 30 highest-performing days in that 20-year period, your total returns would be lower than 20%. Being invested long-term reduces the risk that you'll miss out on large gains.

Mistakes are Somewhat Easy to Fix

The mistakes you make when holding onto long-term investments are also easier to fix when compared to mistakes with short-term investments. As touched upon previously, a company that has a temporary drop in performance might rebound in a few months. If you make a long-term investment in a company that typically maintains a strong performance with steady growth, sticking with them during a short downturn can be highly rewarding. 

Short-term investors tend to sell off investments if they aren't displaying a good performance for a brief period of time. By sticking with your investments in the long run, you can effectively fix any investing mistakes you make.

Popular Long-term Investment Strategies

Long-term investment strategies aren't the same as short-term ones. Before making any of these investments, you should identify the strategy you'd prefer to use. 

Capital Growth Technique

The capital growth technique is designed to maximize appreciation for all of the securities in your portfolio over a lengthy period of time. In most cases, this strategy plays out over at least 10 years. Your portfolio can consist of mutual funds, exchange-traded funds, or equities. The level of risk you wish to take on determines which strategy is best for you. 

Maximum appreciation is only possible by aggressively allocating your funds, which is considered to be a high-risk technique. Long-term investors will usually focus on target-date funds with this technique. The main goal of a target-date fund is to build a retirement plan or fund a college education. With this approach, the fund will be aggressive in the initial years and more conservative as the target date nears.

Current Income Technique

The current income technique is meant to locate established companies with relatively high distributions and a low risk of default. For instance, blue-chip equities are a common focus of people who use the current income strategy. Examples of blue-chip companies include Coca-Cola and Apple. It's you want to earn steady income without needing to take on much risk, this approach may be right for you. 

When you're searching for the best companies to invest in, you'll need to learn about the competitive advantage that the company has, how qualified the management team is, and the company's current growth prospects. Stock prices and quarterly reports are less of a concern. Companies that have a lengthy history of providing steadily increasing dividends would be good options.

Keep in mind that there are times when a company's stock price will drop for a short period of time, which is common in more volatile industries. For instance, stock price drops routinely take place in the oil industry. However, a short-term drop shouldn't adversely impact the ability the company has to pay dividends. The best industries to invest in with this technique include food, healthcare, and beverage, all of which provide essential products to consumers.

Balanced Technique

The balanced strategy is centered around placing a mixture of investments into your portfolio in a manner that evens out the risks and returns. Long-term investors who use this strategy often have an equal amount of stocks and bonds. 

For the half of your investment portfolio that's focused on capital preservation, consider low-yield instruments that pay consistent dividends and high-grade bonds. The riskier side of the portfolio can involve high-paying stocks and equities in businesses that have a low market cap. When taking an aggressive approach, there's a higher opportunity for substantial capital growth. 

If you engage in long-term investing, your main goal should be to obtain good returns over an extended period of time. When done correctly, these investments deliver high dividends while also providing you with a way to meet your financial goals. As a long-term investor, you won't need to follow the ebbs and flows of the market as closely.