- Long term investments are assets that are held for a generally a period of at least three or more years.
- There are several investment strategies that help long term investors maximise their returns, such as current income strategy, capital growth strategy and balanced investment strategy.
- The best approach is highly individual specific and depends on their risk and return appetite, time horizon, investment goals and other factors.
Investing is a long-term process, regardless of an investor is looking to invest for retirement or increasing his income.
And with the onset of the pandemic and fluctuations in the stock market, long term investing has gained even more importance for investors.
What is a long-term investment?
The long term has no fixed tenure, as the definition can vary depending on an individual’s goals. However, generally most investors consider a period of 3 to 5 years or more as long-term investments.
Long term investments are assets held by either an individual or a company with the intention of holding them for a specific long-term period. The type of financial Instruments which are considered as long-term investments are stocks, real estate, cash, and other types of assets.
Long-term investing also means an investor must accept a certain degree of risk associated with their investment in order to get higher returns.
Advantages to long term investing
The main benefit to long-term investing is its higher likelihood of creating wealth in the long term. Moreover, since assets are parked for a longer tenure, they consume a much lesser degree of time compared to short term investing. It also allows investors to reap the benefits of compounding and earn higher returns.
Long term investments also attract lower transaction fees and are more cost effective than short term investing. Brokerage fees and capital gains taxes account for the bulk of investing fees, not including the risk involved with investing.
Furthermore, long term investing is an easier investment method for investors who do not have a high level of expertise in the stock or derivative markets.
Types Of Long-Term Investing Strategies
There are several strategies when it comes to long term investing; some of the most popular ones are:
Current Income Strategy:
Under this type of investment strategy, a long-term investor seeks to identify investment opportunities that has higher-than-average distributions.
Some of the current income paying securities can include stocks that do not contain a risk of defaulting, such as a large cap or blue-chip equities. Some other forms of such securities also include annuities, target-date funds and also government and corporate bonds.
Stocks which fall under this strategy tend to be of companies which have a history of steadily increasing dividend and operate in sectors which do not change often. Sectors such as consumer staples, food and beverages and healthcare are commonly part of this investment strategy.
Capital Growth Strategy:
This strategy aims to maximise an investment portfolio’s capital appreciation. Investors who employ this strategy, select companies which have the potential to grow long term at a higher rate, outpacing the broader market.
Such portfolios mainly focus on equities, having an approximate asset allocation of 65 to 70 per cent in equities and 30 to 35 per cent in fixed income securities and select a moderate growth objective. However, to achieve maximum capital appreciation, portfolios require aggressive asset allocation, which can be risky and would depend on an investor’s risk appetite.
Balanced Investment Strategy:
This approach involves a more balanced relationship with risk and return. Investment portfolios have a more evenly split asset allocation compared to the capital growth strategy. In a balanced investment portfolio, equities account for either half or slightly higher at 60 per cent of the portfolio, while fixed income securities such as bonds account for the remainder.
They also have a smaller money market or cash security to maintain ease of liquidity. This strategy is at the centre of risk and reward; compared to other strategies, current income and capital preservation fall on the other end of this spectrum.
Which strategy is best for you?
The best investment strategy depends on several individual factors, an investor must first be clear on their investment goals, time horizon, risk taking appetite and preferred investment strategy.
The time horizon can be further segmented into three segments which looks at the target date of an investor’s goal, either five to 15 years away, 15 to 30 years away and finally, over 30 years away. Most experts suggest conservatively investing the amount which falls under the shortest timeline.
Diversifying one’s investment portfolio is the key to withstand investment shocks from the market and for hedging against market downturns. Having a mix of varied stocks such as large cap, mid cap, small cap stocks, and growth and value-focused stocks will help diversify the investment risks.
Furthermore, mutual funds and exchange traded funds (ETFs) allow investors an easier way to diversify their portfolio and gain a much broader exposure to the markets. While long term investing is not as time consuming as day trading, it is still important for an investor to review their portfolio investment strategy periodically to make any adjustments. It could involve rebalancing one’s assets due to the asset’s investment objective has changed over a certain period, a change in the investor’s goals or any other factors.
Overall, there are several great options for long term investing, however, the best strategy is the one that is suited to an individual’s specific investment goals and objectives.