7 Best Long-Term Investments to Buy Right Now in 2021

If you’re in a stable financial situation, with a steady income, an emergency fund, and no high-interest debt, you might start thinking about the future. Lots of people have long-term financial goals, such as buying a house, helping their children pay for college, or retiring.

Investing is one of the best ways to take the money you have now and to grow it into a larger balance that you can use to accomplish those goals.

Before You Invest

Before you start investing, take a few minutes to think about your finances. Make sure your situation is truly stable. If you have a good income but no money in the bank, you should build up some savings before you start investing. Similarly, if you have credit card debt, it’s usually best to pay that balance off before you put money into long-term investments.

Also, keep in mind that investing is subject to risk and many long-term investments can be volatile in the short-term, even if they tend to perform well over the long-term. Only invest money that you can afford to lose.

Goals of Long-Term Investing

People who invest for the long-term generally have a few main types of goals.

Preserving Your Money

Investing your money to try to preserve its value might not make much sense at first. Given that investing includes a risk of losing money, why not just put your savings in an FDIC-insured savings account?

Inflation is a phenomenon that reduces the value of money over time. You’ve probably seen the effects of inflation during your lifetime as prices for goods have risen or product packages have shrunk while prices held steady. Your grandparents weren’t just joking about buying a loaf of bread for a nickel back when they were young. A nickel has simply become worth much less because of inflation.

Some amount of inflation is healthy for an economy because it encourages spending and growth. However, the inflation rate is usually higher than the interest rates that banks pay on savings accounts. If inflation is 2% and you put all your money into a high-yield savings account paying 0.5% interest, your savings will lose 1.5% of its purchasing power each year.

Investing for the long term can help you earn a high enough return to match or beat inflation, preserving the spending power of your savings.

Growing Your Wealth

Beyond matching inflation to preserve your money’s purchasing power, you can invest to try to grow your savings over time. Many long-term investments offer high potential returns that will help you grow your portfolio over time.

Saving for a Specific Goal

Although investing to grow your portfolio is a fine goal, some people have specific plans for their money, such as funding their retirement or saving for a down payment on a home. These are typically long-term financial goals but your reasons for investing and your time horizon for needing to withdraw your money could affect the strategy that you use.

Best Long-Term Investments to Buy Now

If you’ve decided that you want to try investing for the long-term, these are some of the best ways to do so.

1. Stocks

Stocks are one of the first investment vehicles people think about when they hear the word investing.

Buying a stock gives you an ownership stake in a company, which frequently comes with the right to vote on certain decisions the company has to make and a cut of the company’s revenues in the form of dividends.

Just as there are different types of companies, there are many different types of stocks. You can buy shares in companies in different industries and in companies of different sizes. In general, smaller businesses are seen as higher risk, but with higher potential for reward. Large, established companies, often called blue chips, don’t offer the same growth potential but are generally viewed as more stable.

All stocks can be volatile. If a company has a poor quarter or year, its stock value can drop by a significant amount. Similarly, a company that does well can see its stock’s price grow. Over the long-term, the stock market as a whole tends to grow but there have been years and even single days where stock prices have fallen by 10%, 20%, or more. That means it’s important to build a diverse portfolio and to make sure that you can withstand the volatility of stocks.

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2. Mutual Funds and ETFs

Mutual funds and exchange-traded funds (ETFs) are a way to easily invest in a professionally-managed, diversified portfolio.

Investors can purchase shares in mutual funds and ETFs. The funds’ managers then use the money from the pool of investors to construct a portfolio for the fund. Managers can build portfolios based on a variety of strategies.

For example, index funds aim to track a specific market index, like the S&P 500 or the Dow Jones Industrial Average. Other funds look to give investors exposure to a class of stocks, like blue chips or dividend-paying stocks, or certain industries such as consumer staples or utilities. There are also funds that hold a mixture of stocks, bonds, and other investments.

Other mutual funds are actively-managed, meaning the fund managers try to beat the market by buying shares when they’re cheap and selling them at a profit.

When investors buy shares in a fund, they get exposure to all of the investments in the fund’s portfolio. By buying shares in a single fund, you can effectively have a portfolio that holds hundreds or thousands of different securities.

Mutual funds charge fees. One of the most common fees is called an expense ratio, which is the percentage of invested assets that you must pay each year. For example, if you invest $10,000 in a mutual fund charging a 1% expense ratio, you can expect to pay $100 each year assuming the fund never gains or loses value.

These fees can have a significant impact on investment returns, especially over the long-term.

If you invest $100,000 and earn a 7% return for 40 years, you’ll have $1,497,445.78 after the 40-year period. If you paid a 1% fee annually, reducing your return to 6%, you’d have just $1,028,571.79.

This makes looking for low-cost mutual funds and ETFs important if you decide to use them to invest.

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3. Target-Date Funds

Target-date funds are a type of mutual fund. Typically, target-date funds are designed to make it easier for people to save for retirement or other goals with a known end date, hence the name.

Target-date funds typically hold a mixture of stocks, bonds, and other investments. When the target date is a long time from the present, the fund holds a more aggressive mixture of investments — typically more stocks and fewer bonds. As time passes and the target date gets closer, the fund managers reduce the fund’s stock holdings and increase its bond holdings. This gradually reduces both its volatility and its potential returns.

The idea is that these funds aim to maximize growth by taking risks when the investors can afford to, and to become more conservative and reduce risk when investors start thinking about making withdrawals.

4. Real Estate

Real estate is a popular investment for a few reasons. One of the major advantages is that people commonly use leverage — borrowed money — to buy houses, which lets them buy more expensive properties than they could if they paid with cash.

Real estate also provides the potential for value appreciation and income. Landlords rent out their properties and charge rent, using the income to pay for maintenance and cover mortgage costs. Over time, the properties may gain value, letting the landlord sell them for a profit.

Even if you don’t buy properties to rent them, buying your own home can be considered a real estate investment. You benefit from rising property values and also the fact that your mortgage payment stays the same over the life of your loan, whereas rents typically rise over time.

Investing in real estate isn’t without risks. Properties can be damaged by natural disasters or experience a host of costly maintenance issues, and individual housing markets can heat up or cool down. If you buy properties in a location that starts to do poorly, you could lose a lot of money and wind up underwater on your mortgage.

Additionally, being a landlord can be a lot of work. You have to find and vet renters, collect payments, deal with vacancies, and handle repairs to your properties. You can hire help to handle all of that, but it comes at a cost.

One popular real estate investment strategy is to buy shares in a real estate investment trust (REIT). REITs are like mutual funds or ETFs that hold real estate. The REIT handles all the management of the land and buildings for you and lets you easily diversify your investment among hundreds or thousands of properties. You can also invest in real estate through companies like Fundrise. Investments start at just $1,000.

5. Robo-Advisors

Robo-advisors are software programs that manage investments on your behalf. There are many different robo-advisors out there such as SoFi Invest and Betterment. Each have their own strategies and features, but they share some similarities.

When you open an account with a robo-advisor, you have to answer some questions about your risk tolerances and investing goals. Based on your answers, the robo-advisor will build a diversified portfolio for you. All you have to do is deposit and withdraw money when you want to and the robo-advisor handles the rest.

Robo-advisors have some features that give them additional value for long-term investors. One common feature is tax-loss harvesting. The robo-advisor automatically sells some investments at a loss and reinvests the money, letting you use those losses to reduce your taxable income in the year the losses occur.

Deferring your taxes in this way lets you keep more money invested in the market, which the robo-advisors claim can significantly improve your investment performance over the long term.

Robo-advisors charge investment fees — typically a percentage of your invested assets. Most claim that their benefits and features like tax-loss harvesting will increase your returns by enough to cover these fees, but often these features are only available to customers with higher balances.

Before investing with a robo-advisor, consider the fees and whether you think the benefits outweigh the costs.

6. Alternative Investments

Stocks, bonds, and mutual funds are all considered traditional investments, but some people like to hold alternative investments, which include fine art through companies like Masterworks, collectibles, farmland, commodities, and hedge funds.

Investing in alternative investments can be complex and highly risky. However, some people like to include them as a small portion of their portfolio because of their potential for large gains and their lack of price correlation with traditional investments.

7. Career Development

Career development isn’t a traditional investment in the way that stocks and bonds are, but it’s still an important and lucrative way to invest in your future. Investments in career development can include gaining certifications important to your industry, going to college to get a degree, or paying for an online course or two that will teach you skills that you can use for your job.

Yahoo Finance reports that, according to the Bureau of Labor Statistics, the average help desk analyst earned just under $51,000 in 2019 — but those who earned the CompTIA certification made an average of $59,000, an $8,000 increase.

That’s just one example; certifications are available in many different fields. Taking a class and studying for a certification can cost a few hundred or thousand dollars, but if it can give your income a significant boost, the investment will pay off handsomely throughout your career.

Don’t Forget Tax-Advantaged Accounts

If you’re investing for the long-term, there’s a good chance you have a goal in mind, such as retirement or helping a child pay for college.

Don’t forget that there are tax-advantaged accounts that can help you achieve these goals. Retirement accounts like IRAs and 401(k)s let you reduce your taxes, meaning you can save more money. Many employers also provide matching contributions for retirement saving, which can help you save even more.

Educational accounts like 529 College Savings Plans also provide tax benefits that vary with where you live.

If you have a specific goal for your investments, make sure to take advantage of every tool provided to help you reach your target.

Strategies for Long-Term Investing

If you’re investing for the long-term, keep these tips in mind.

Diversify Your Portfolio

One of the most dangerous mistakes you can make when you invest is to put all your eggs in one basket.

If you invest all of your money in a single stock, your portfolio’s performance hinges on that company’s results. If the company does well, your portfolio will grow. But if the stock loses value, your portfolio will lose value. In the worst case, if the company goes under, you’ll lose your entire investment.

If you build a diversified portfolio that holds multiple investments, there’s a much smaller chance that you’ll lose your entire investment. If one company performs poorly, strong performances from the others could make up the difference.

This is one of the reasons mutual funds and ETFs are so popular. They make building a diversified portfolio easy.

Don’t Try to Time the Market

The old saying that “time in the market beats timing the market” exists for a reason. It’s almost impossible to predict how the market will perform over the next day, week, month, or year. Many people have lost money by trying to time the market, only to sell at market lows or buy at market highs.

A good illustration of this is the story of the “worst market timer ever” published by Alex Rosenberg for CNBC. This hypothetical person started investing in 1973, buying shares only at market highs in 1973, 1987, 2000, and 2007 — the worst possible timing, right before major crashes — but never selling. By 2015, the unluckiest long-term investor had still earned a return of $980,000 on an investment of just $184,000.

The key is avoiding the urge to sell when the market goes down. Someone who tries to figure out the best times to buy and sell instead of just holding investments for the long term would likely perform much worse.

One of the best strategies is to decide on an investing schedule and to stick to it no matter what the market is doing at the moment. For example, commit to investing $400 on the first of every month or a percentage of every paycheck, regardless of whether the market is up or down.

Track Your Progress

It’s important to keep track of your progress toward your investing goals. Just because you want to avoid timing the market doesn’t mean that you can’t make changes to your strategy over time.

For example, you may decide that you’re paying too much in management fees for a mutual fund or robo-advisor and may move to a different fund or advisor. You may also change your goals, which will necessitate and change in investing strategy.

Tracking your progress will also let you get a sense of whether you’re on track to achieve your goals. If you find that your portfolio isn’t growing quickly enough, you may have to increase your savings rate or adjust your investing timeline.

Final Word

Investing can be complicated, but it’s one of the best ways to help your money grow, especially over the long term. Build a diversified portfolio, try to minimize the fees that you pay, and stick to a schedule with your investments and you can succeed over the long term.

Published at Tue, 02 Feb 2021 23:56:01 +0000