Long Term Investments
Long Term Investments
There are short term investments, which usually take less than a year until they reach fruition. And then there are long term investments which are normally categorized as taking at least a year and usually much longer before they are fully realized. Long term investments for individuals are commonly associated with retirement investing.
Another difference between short term and long term investing is that with the latter the investments may never be sold. This means that the decisions you make today will affect your portfolio for many years to come and even the rest of your life. You will have to take some risk, be patient as the years pass, and you’ll need enough capital set aside so you can reap the full rewards of the investment.
How to Get Started with Long Term Investments
If you are looking to invest for the long term, then the first step is to assess where your finances stand right now. This means a comprehensive look as how much money you can afford to invest and what is needed for you to fully realize the long term investments that you want to participate. In order to do that, you will need to assess the following.
- Current state of income and debt
- Creating a debt repayment plan if needed
- Building an emergency fund
- Think about establishing a Family Office
In other words, you need to know where your finances stand, what debts you must pay off, and have enough money to pay for emergencies such as medical payments, car repair, and the like. By setting up your finances in this order, you can then participate in long term investing. Otherwise, you run the risk of pulling or withdrawing your funds before the investments are fully realized. This can not only rob you of your goals, but also may force you to sell at a loss and pay even more due to implications involving your taxes.
Bottom line, you need to be ready before you can start making long term investments. Once you are ready, here are some tips that will get you on the right path.
Setting Goals for Long Term Investments
You’ll need to set clear goals as to the nature of your investment. Knowing what it is for will help you make the best-informed decisions on how much to invest and what types of investments work best. Common types of long term investments include the following.
- College Education Fund for Your Children
- Creating a Down Payment to Purchase a Home
Whatever you choose, the purpose should be to set the parameters of reaching your goal in the time allotted. Such goals may take one year, five years, or thirty years or more depending on your circumstances. But knowing what goal you have in mind will help you find the best path to reach it on time.
For example, saving up for a down payment for a home should take considerably less time compared to building up your retirement funds. It may seem counterintuitive at first, but the further away the goal, the more risk you can take on now. This is because your funds will have time to recover from a short-term loss.
Understand the Risk of Long Term Investments
Virtually all types of investment involve some element of risk. From putting money in stocks to burying out back in a coffee can, no form of investment or even holding back money is free of risk. For most new investors, the fluctuations of the stock market can be quite frightening. It will be incredibly tempting to pull your money out during a time of crisis. But as history indicates, the stock market will bounce back at some point in the future.
Barring the complete collapse of a stock, the only time you should make significant changes is when you get closer to your goal. That is because the timeframe of your investment changes, so you will need to switch from the riskier methods to safer ones to protect what you own.
Just keep in mind that even bonds are not fully safe from risk. While corporate bonds may seem invulnerable, if the company goes bankrupt, they are taking the bonds with them. You can minimize this risk by only choosing companies with substantial credit ratings, but even they can go belly up under the right circumstances.
The bottom line is do not panic. Keep your investments in place during a time of crisis. It’s one thing to make the switch before something bad happens, but when it starts happening it is normally too late.
Choose a Long Term Investment Strategy
Now that you know what you want, the next step is choosing a strategy to get there. You’ll need to do some research to find the best strategy for your needs. And once you have selected it, you’ll need to stick to it over the long term.
This can be difficult, especially if your investments suffer from unexpected losses. But what is important is that you stick to a strategy for building your funds over time if you want it to work for you. Part of the strategy will be based on the length of the investment. The further away the target goal is, the more risk you can take.
In saving up for a down payment that you want to achieve in five years or so, then you should be conservative and choose safer investments such as mostly bonds. While longer terms investments should have a higher percentage of stocks at least at the beginning.
Over time as your goal gets closer your strategy will change. For retirement planning, you will gradually switch from mostly stocks to adding more bonds as your retirement date nears.
Diversify for Strategic Long Term Growth
It’s a general rule that you should divide your investments into riskier stocks that offer better payouts and safer bonds that may offer less, but do not fluctuate nearly as much. Diversifying means that if something should happen to one of your investments, such as the stocks of a company plunging in value, the rest of your portfolio remains sound. This means that your investment can take a hit and not lose its value because you have properly diversified.
A mix of stocks and bonds is a good start, but to be more specific you should purchase stocks from different size companies in different fields. That way, if something should plunge in value in one field, such as technology for example, you may only lose value in one of your stocks. The rest of your stocks being spread out in different fields that remain unaffected.
In addition to the size and field of the companies you choose to invest, there are growth and value stocks that you can consider as well.
Growth stocks are associated with companies that are garnering healthy returns. They are usually in fields that are considered trendy and can gain a considerable amount of profit over a relatively short period. However, all trends come to an end, so knowing when to move out and choose another growth stock is crucial.
Value stocks are stocks available at bargain prices. This means that the company itself is being undervalued, so their stocks are not priced as they should be. Investing in value stocks may reap considerable benefits once the true value of the company is reflected in the price.
Fees for Long Term Investments
One important and often overlooked aspect is the fees and costs of maintaining your investments. Such fees may come from the management of your funds or from the ratio of expense that come from the funds you have invested.
While some fees may seem small at first, they can add up over time. You will need to assess all the fees and costs associated with your investments. Although there is no hard and fast rule, you should seek investments and management that does not exceed 0.25% per year of your total investments. You should include any sales and surrender charges to that amount.
Adding some index funds that are low cost will help offset some of the fees, so you should include that in your investment portfolio.
Change Strategy When Necessary
Rules are made to be broken, so if you get into a situation in which change is necessary, do not be afraid to pull the trigger. In most respects, long term investing involves patience and getting through the ups and downs of the stock market. But there are times in which you should consider abandoning some investments to take advantage of other opportunities.
Most notably in the higher risk investing of growth companies. Jumping on a new trend while it is still in the early stages can help bolster your portfolio considerably. Just be sure to remove funds from other high-risk investments and keep the safer ones in place.
Long term investments are never easy, but you can simplify the process to maximize the growth potential. By following simple rules, staying patient during times of fluctuation, and making the gradual switch from riskier to safer investments over time may result in reaping considerable rewards when it is time to cash in.
Long Term Investments ©Sophisticated Investor 2021
About the author:
Zanthe Alexander Bentley is a finance veteran with over 25 years’ wealth management experience advising both family offices and institutions on their corporate finance requirements including capital raises (debt & equity), restructurings and M&A activities. He has significant experience in investment management and investment banking and spent nine years at UBS focused on convertible bond arbitrage and equity derivatives.
Prior to getting involved in Asset Management he expanded a small Spanish brokerage from a handful of staff in Barcelona to a diversified brokerage company with over 150 personnel spread across 9 countries, transacting deals from High Grade to High Yield Fixed Income and Loans; Structured Products through to exchanged traded equities.
After taking time to focus on family office activities in Asia, Zanthe-Alexander now leads an ambitious zero-leveraged fund providing exceptional growth and income to Sophisticated Investors.