Long-term investing is a great way to accumulate wealth and cater to future needs while living a relatively stress-free investor’s life. Long-term investing is a preferable investment strategy, especially when survival-dependent amounts such as retirement funds and college tuition fees are at stake.
Investments held for longer terms, such as over three years, are subject to a high-risk level. These may not react to short-term market fluctuations, but they do reflect declining market value and inflation. Hence, long-term investments may not be a definite way of making capital gains, but they can ensure a high return ratio over a few years.
This article will explore some of the best options you should invest in for long-term growth, the rewards and risks associated with each and to answer the question “What Should I Invest In For Long-Term Growth?”
1. Growth Stocks
Growth stocks represent companies and businesses that are believed by analysts to perform better than the rest of the market. This may be because of the line of products, demand among the consumers, or some revolutionary idea behind the company.
Amazon Inc. and Facebook are typical examples of growth companies that have been extremely successful over the years. Such growth stocks are always recommended to invest in for long-term growth.
Growth stocks are leaders in their respective niches, such as Amazon, Tesla, and Google. They continue to reinvest and expand their consumer base so that the rate of revenue generation remains higher than the market average.
Since growth companies have a huge competitive advantage over their peers, the consumer base stays for a long time and keeps on growing as well. This whole scenario of exponential and consistent growth points to substantial revenue generation for investors through capital gains.
Growth stocks typically offer very low dividend amounts, if any. Growth companies grow at a rapid pace and tend to reinvest their profits to boost revenue generation further.
Growth stocks sure do outperform a bull market. That is, growth stock prices rise at a more rapid rate in a bull market as compared to the overall market. At the same time, growth stocks tend to decline at a more rapid rate than the rest in a bear market. This scenario makes growth investments volatile, especially for a relatively shorter-term scenario.
2. ETFs and Mutual Funds
Stock funds, i.e., Exchange-traded funds (ETFs) and mutual funds make decisions easier, especially for those who cannot allocate enough time, research, and expert opinions to their investing career. ETFs and mutual funds let you start small and can provide dependable and safe returns on long-term investments.
Stock funds allow you to own a small share of a large portfolio of many investors, a phenomenon called pooling money. Each investor gets a percentage of profits and expenses, and won’t have to micromanage stocks every day.
ETFs and mutual funds offer diversification of the portfolio. When some companies in a certain portfolio fail to perform well, others will be there to average out the annual returns on investment. This reduces the volatility and risk associated with the investment a great deal.
In addition to more stable returns, ETFs and mutual funds are less work to own and manage, which is the whole point of a long-term investment. You can choose to manage your ETFs now and then depending on the expert analyses regarding a certain ETF. Otherwise, they track an index, and hence are passively managed.
For mutual funds, a fund manager actively manages the stocks as a single investment. The stock funds will continue to generate dividends or revenue, and the expenses and taxes will be deducted automatically on each transaction. And there is very little that you will be required to do.
Stock funds provide diversified and stable periodic returns. But the risk of decline in liquidity and failure of performance of various stocks in a bearish market stays, as with most other investments.
If a mutual fund or an ETFs’ portfolio is not well-chosen and diversified, the ongoing management costs, buying and selling expenses, and taxes on transactions can drain your principal investment.
3. Dividend Stocks
Dividend stocks are a great option you should invest in for long-term growth. These are mature, well-established companies that pay back earnings to their investors. Companies in the oil and gas, banks, and financial sectors typically are stable enough to pay quarterly dividends.
The choice to invest in dividend stocks depends on the individual preference for periodic income over capital growth. Though dividend stocks grow over time as they generate periodic revenue, growth in value is considerably smaller than in stock funds and growth shares.
Dividend stocks offer an opportunity for both income and growth investing with a single investment. The growth rate of the dividend stocks is only average since these are mature companies with little margin of capital appreciation.
The biggest benefit of dividend stocks is that whether the stock price goes up or down, the company will continue to disburse the quarterly dividends.
In extreme situations such as the COVID-19 economic crisis, the company may stop paying dividends to its investors.
Another risk comes from the lack of experience and knowledge. A new investor may not be able to understand the right balance between the dividend yield and pay-out ratio. A company that pays high dividends compared to its peers will have a small pay-out ratio, which is a sign of weak sustainability. The stock will fall in value drastically after paying a few dividends.
4. Value Stocks
Value stocks are the bargain-priced shares of a company with a high dividend yield and low P/B and P/E ratios. Value stocks trade for a lower price as compared to what the fundamentals would indicate. For instance, Citi Corp and JPMorgan Chase (JPM) traded at significant discounts in June 2019 as compared to their corporate performance.
If the market has a negative sentiment about value stocks, the underlying risk is greater with value stocks as compared to the growth stocks. Value stocks are more beneficial as investments for long-term growth when the risk and short-term losses are distributed over a longer time span.
By choosing value stocks backed by strong performing companies (temporarily available at a discount), value stocks can provide high returns over time.
Value stocks are less affected by market fluctuations. When the market falls, they tend to fall less. But when the market rises, they do produce returns. Some of them can also offer dividends, instantly diversifying your investment portfolio.
Value stocks are mostly well-performing companies facing adverse times. The shares may be available for a lesser price than their intrinsic value, but the risk of the stock never emerging back is always there.
Strong homework and reliable estimation of the intrinsic value of the stock by the investor are important in choosing the right value stocks. But factors such as market attitude, and changing company management are very difficult to equate and can act as risk factors.
5. Real Estate
Real estate has been the favourite investment of the British for long-term growth. It is safe, low-effort, and low-risk, and pays high returns after only a few years.
Real estate investment requires a large initial capital and may be drastically affected by local factors. But what makes it attractive is the variety of options you get.
A real estate investor can simply purchase land with no recurring costs and consolidate the capital gains after years by selling it off. For income returns along with capital growth, residential and commercial real estate are great options.
Real estate is a versatile investment option that offers both income and growth opportunities. Rental income can account for the loan instalments or maintenance costs of the property. And over just a few years, real estate can be traded for significant capital appreciation.
Real estate also has enough room for losses, for instance, if the property is not well-located or does not have a resale. Real estate does not offer much diversification. If, for some reason, the real estate does not grow enough in value over a certain number of years, either you will have to wait or consolidate your loss. In either case, inflation will catch you sooner.
Also, if you don’t have a tenant, the maintenance costs and mortgage can quickly become an additional burden on investment.
Answering “What Should I Invest In For Long-Term Growth?”
Long-term investments are the best strategy for people who are not full-time investors. These investment options may not be a good field for learning and experimenting, but they are a great first step to building wealth and may generate periodic incomes.
This investment style, however, requires patience and a willingness to go through short-term losses for major capital gains.