Thinking about investing long term? Here are some great tips to do so wisely.
1. Growth Stocks
Growth stocks are essentially the Ferraris of the stock investing world. They not only promise high growth but also massive returns. Growth stocks are usually tech companies, but this doesn’t always have to be the case. All their profits are generally plowed back into the business, which is why dividends are rarely paid out, at least not until their growth slows.
Growth stocks carry some risk since they often will pay a lot of the stock relative to the earnings of the company. So, once a recession or bear market arrives, these stocks can lose a lot of value incredibly quickly. It is like their sudden popularity disappears instantly. Still, growth stocks have been some of the best performers over time.
If you plan to buy individual growth stocks, it is important to first analyze the company carefully, which can take a great deal of time. Due to the volatility of growth stocks, you will need to have a high tolerance for risk or commit to holding the stock for a period of at least 3 to 5 years.
Risk Vs. Reward: Growth stocks are some of the riskier segments of the market since investors are willing to pay a lot to own them. Unfortunately, these stocks can easily plummet once the tough times arrive. That said, the largest companies in the world – the Amazons, the Alphabets – have all been high-growth, which means that the reward is possibly limitless if you are able to find the right one to invest in and a good approach to long term investing.
2. Stock Funds
If you don’t like the idea of spending your time and effort to analyze individual stocks, then a stock fund (mutual fund or ETF) can be an excellent option.
If you invest in a broadly diversified fund, such as a Nasdaq-100 index fund or an S&P 500 index fund, you will get access to numerous high-growth stocks and many others. However, you will have a safer and diversified set of companies than if you own just a handful of individual stocks.
A stock fund is a great option for any investor that would like to be more aggressive, but lacks the desire or time to make investing their full-time hobby. If you buy a stock fund, you will get the weighted average return of all stocks in the fund, which means that investing in the fund is generally less volatile than just holding a few stocks.
If you invest in a fund that’s not broadly diversified, such as a fund based in one industry, you need to understand that it will likely be less diversified than a fund based on a broad index such as the S&P 500. So, if you invested in a fund that’s based on the automotive industry, it might have a lot of exposure to oil prices. If there’s a rise in oil prices, chances are that many stocks in the fund will take a hit.
Risk Vs. Reward: Stock funds are generally less risky than buying individual positions and require less work. Still, stock funds can move quite a bit in any given year, potentially losing as much as 30 percent or even gaining 30 percent in the extreme years.
That said, stock funds will be less work to own and follow compared to individual stocks, but since you own a bigger number of companies and not all of them will perform exceptionally well in any given year, then you can expect more stable returns. With stock funds, there’s also plenty of potential upside.
3. Bond Funds
A bond fund (ETF or mutual fund) contains many bonds from various issuers. Bond funds are typically categorized by the type of bond in the fund – duration of the bond, how risky it is, the issuer (municipality, corporate, or federal government) along with other factors. So, if you would like to invest in a bond fund, there are plenty of choices to meet your needs.
When a government or company issues a bond, it agrees to pay the owner of the bond a set amount of interest every year. At the end of the bond’s term, the issuer repays the principal amount of the bond, and the bond is redeemed.
A bond can be one of the safer investments, and bonds can actually be safer if they are part of a fund. Since a bond fund may own hundreds of bond types, across multiple issuers, its holdings are diversified and this lessens the impact on the portfolio in case one bond defaults.
Risk Vs. Reward: Bonds may fluctuate, but bond funds remain relatively stable, but may still move in response to movements in the prevailing interest rate. Bonds are generally considered safer compared to stocks, but not all issuers are the same. Bonds issued by governments, especially the federal government, are all regarded as quite safe, while the riskiness of corporate issued bonds can range from slightly less risky to much riskier.
The return on a bond or bond fund is typically much lower than it would be on a stock fund, perhaps 4 or 5 percent each year but even less on government-issued bonds. Still, it is much less risky.
4. Dividend Stocks
Dividend stocks can achieve solid returns, but unlike growth stocks, they are highly unlikely to speed higher as quickly.
Dividend stocks are those that pay dividends, which are regular cash payouts. Many stocks offer dividends, but they are more commonly found among older, more mature companies that have lesser need for their cash.
Dividend stocks tend to be more popular with older investors since they generate a regular income, and that dividend has the potential to grow over time, which means you can earn more than you would with a bond’s fixed payout. One popular form of dividend stock is REITs.
Risk Vs. Reward: Dividend stocks are usually less volatile than growth stocks, but you must never assume that they never rise and fall significantly, particularly when the stock market hits a rough patch.
Still, dividend-paying companies are usually more established and mature than growth companies, which is why they are generally considered safer. That said, if a dividend-paying company fails to earn enough to pay out dividends, it will cut the payout and its stock can plummet as a result.
The big appeal of dividend stocks is the payout, and some of the top companies pay 2 or even 3 percent annually, sometimes more. But importantly, they can raise payouts by 8 or 10 percent per year for extended periods of time, which means that you will get a pay rise, usually each year.
The returns associated with dividend stocks are often high, but usually aren’t as great as the returns associated with growth stocks. If you prefer to invest in a dividend stock fund so that you can own a diversified stock portfolio, you will find plenty available.
5. Target-Date Funds
If you don’t look forward to managing a portfolio yourself, target-date funds can be an excellent option. These funds become increasingly conservative as you age, which makes your portfolio safer as you approach retirement when you will need the money. The funds shift your investments gradually from more aggressive stocks to more conservative bonds as your target date nears.
Target-date funds are a popular option in many workplace 401(k) plans, but you can still buy them outside those plans, too. All you have to do is pick your retirement year and the fund will do the rest.
Risk Vs. Reward: Target-date funds have many of the same risks as bond funds or stock funds since they are essentially a combination of the two. If your target date is decades away, the fund will own a higher proportion of stocks, which means that it will be more volatile initially. As the target date nears, the fund will shift towards bonds, which means that it will fluctuate less but earn less too.
Since target-date funds move gradually towards bonds over time, they will typically start to underperform the stock market by a growing amount. You are basically sacrificing return for safety. Since bonds are increasingly yielding lower these days, you have a higher risk of outliving your money.
To avoid such a risk, financial advisors recommend buying target-date funds that are 5 or 10 years after your planned retirement date so that you will have the extra growth from stocks.
6. Real Estate
Real estate is in many ways a prototypical long-term investment. Getting started takes a good bit of money and the commissions are incredibly high, while the returns usually come from holding an asset for an extended period and rarely over just a couple of years. Still, real estate was the favorite long-term investment for Americans in 2021, according to a Bankrate study.
Real estate property investment can be an attractive investment, partly because you can borrow the bank’s money for most of the investment and then pay it back over time. This is especially popular since interest rates are sitting near attractive lows. For those looking to become their own boss, property ownership gives them the chance, and there are numerous tax laws that benefit property owners specifically.
That said, while real estate is usually considered a passive investment, you need to do a bit of active management if you are renting out the property.
Risk Vs. Reward: Any time you are borrowing significant amounts of money, you are putting additional stress on an investment turning out well. However, even if you buy real estate with cash, you will still have a lot of money tied up in one asset, and this lack of diversification can cause problems should something happen to the asset. Even if you don’t have a tenant for the property, you must still keep paying the mortgage along with other maintenance costs out of your own pocket.
While the risks might be high, the potential rewards can be high too. If you have selected the right property and manage it properly, you can earn many times your investment if you are willing to hold the asset over time. If you pay off the mortgage on a property, you can enjoy greater stability and cash flow, which is why rental property is such an attractive option for older investors.