What are long-term investments?
This type of investment is usually suitable for instruments with terms greater than 5 years and for objectives such as retirement, buying a home, children’s studies, etc.
Among the most popular instruments are stocks, real estate, and bonds, among others.
Below we will look at each of these instruments in which you can invest your money.
1. Financial bonds:
Instruments are issued by the Government or companies in search of liquidity to face their projects.
By acquiring the financial bonds you obtain the right to collect an amount of money in the future. The terms are greater than 3 years and you must take into consideration that if you sell the bond before expiration, you will be penalized in the final earnings.
2. Real Estate:
This option is one of the best known in the investment world and its returns are quite attractive.
To invest in real estate, we recommend that you approach an advisor so that, based on his knowledge, he can guide you in your investment and achieve a return on your capital.
3. Stocks (stock):
Another option that is often attractive to people is to invest in the stock market. In it, there is the possibility of achieving great returns over the years.
For example; who has not heard of the great investor Warren Buffett, who thanks to his knowledge and skills managed to be one of the best investors in history. This fact has generated high interest in the investment community that seeks to replicate it.
To achieve this, it should be clarified that Buffet specialized in long-term investments with the strategy of buying shares based on established parameters and maintaining his investment for years until the expected return, or as close to it as possible.
It is important to mention again the importance of a diversified portfolio so that in case of poor performance in any sector, other assets compensate for the possible loss.
This is why, before investing, you must know what the stock market is; Research, compare, and analyze the instruments or actions to select to achieve higher returns.
4. Index Funds:
These types of funds replicate a reference index such as the S&P500 of the United States (which includes the 500 most important companies in that country). Another example is the Nasdaq 100 which is made up of more than 100 companies from all over the planet.
Index funds are considered a type of long-term profitable investment, as they present an upward trend in the vast majority of world indices (even in crises) that have shown a continuation of their upward trend in time horizons greater than 5 years.
5. Investment funds:
This type of instrument is managed and operated by financial experts who bring together several small investors to generate higher returns together by investing in the stock market.
6. Pension plans:
In a large part of the countries of Latin America and Europe, the issue of pensions has become increasingly important due to the change in the population pyramid.
This shows a decomposition in which the youngest will be affected by reducing the amount of their pension or simply not having one when they reach retirement age.
Therefore, it is vital that from now on they worry about their future and contract a pension plan or, if they have one, make voluntary contributions every month to reach their old age with a considerable pension.
How do these types of investments work?
To better understand the operation of long-term investments, it is necessary to mention that this type of investment seeks to obtain the highest possible return in periods greater than 5 years.
The idea is to invest money in an asset to achieve higher returns over the years. To achieve this, they can approach a financial advisor or do their own research to learn how to build a well-diversified portfolio to invest in.
Once you have acquired the necessary knowledge to invest, you choose the instruments within those mentioned above or any other type of investment that suits your situation, always with the premise of keeping them until the end of the deal.
The objective is to generate profits for goals such as retirement or the children’s studies. In conclusion, it has to be money that we do not withdraw in the short or medium-term to obtain all the returns.
Characteristics of long-term investments:
Below we present a series of characteristics of this type of investment so that you have a criterion to decide if it is convenient for you to invest within this time horizon:
- Must be older than 5 years
- They must be diversified instruments to avoid the volatility that could arise
- Seeks to obtain higher returns than short-term investments.
- You have to sacrifice money to use in the short term, but the reward in the long term can bring with it a large sum of profit
- They are especially suitable for people who want to make stock investments
Advantages of long-term investments:
If you are interested in this type of investment, here are some advantages you get when investing your money for the long term.
Reduces uncertainty: Because having a horizon of more than 5 years, your assets can withstand crises and market volatility.
You reduce the cost of investing: Since you free yourself from banking and transactional commissions typical of buying and selling assets in a short period. On the contrary, by having a long-term time horizon, it is not necessary to carry out daily operations in periods of less than one year.
For example, if your investments in a year have achieved the objectives set, you maintain the same strategy until some factor causes you to modify an asset. But in essence, the movements are substantially reduced and, consequently, the commissions.
You have greater security: This is mainly because more time is spent studying and investigating the various instruments that exist in the market and selecting the one that best suits your portfolio, thanks to the previously acquired information.
You will be disconnected from the markets: Because you avoid the stress generated by speculating in the markets every day and having to be glued to the computer for much of your day. On the other hand, you simply review every month or even every year how your investments are doing, allowing you to save time and money.
Disadvantages of long-term investments
However, like any investment you make, there are several disadvantages that you should take into account when making an investment decision.
Not having immediate liquidity: being investments with very long time horizons, you will not have your money until the agreed term is fulfilled.
Volatility: This element of the economy generates that sudden changes in the market can reduce long-term returns, for which it is necessary to monitor this variability in the stock market.
Variation in currencies: Even if you do not directly invest in foreign currencies, your returns could suffer some variation if other stronger currencies such as the dollar are taken as a reference.
Difficulty to recover the investment: Mainly in the short term, the return on the investment will occur gradually and more in the long term, so you should wait a minimum of between 3 and 5 years or even a longer period.
Risks of this type of investment
Like any investment, long-term investments carry risk by nature. Although it is true, that this risk situation can be reduced if the investment is for more years, the action of not selecting the correct assets for your investor profile can play against you.
Another situation that could generate losses is that of not diversifying your portfolio. This could result in losses in your entire investment portfolio and expected returns.
For this reason, it is advisable to know in-depth what you are investing in. If you can’t take the time to study the subject, it is important to go to an expert who advises you to avoid the risk as much as possible.
Another factor to take into account is the volatility of the markets. This element can cause you to decide to withdraw your money when in doubt about the direction of the market, producing returns that are unfavorable to your economic objectives.
Therefore, it is important to understand that the nature of the market is like this, but you can counteract it with a long-term strategy that allows you to be calm in times of crisis or financial uncertainty.
A direct risk that can hurt the chances of your investment in the laws of the country in which it was invested. The risk increases if it is in countries in which by nature there is instability in their form of government. Therefore, it is advisable to always be aware of any micro and macroeconomic changes in the country.
In conclusion, long-term investments are usually a good way to diversify our investment portfolio that, when combined with short- and medium-term investments, can boost our investments.
The central objective of diversification in various time horizons is to minimize risk and increase profits.
So today you have taken another step in your knowledge as a more informed investor, which will allow you to make better decisions.
Therefore, we suggest that you continue along the same path and contact a financial advisor or keep learning on your own, so that you can achieve that amount for your retirement or achieve the long-awaited financial freedom. So, don’t stop learning every day and make money work for you.