Determining which long term investment options and strategies are right for you can feel completely overwhelming. With markets rallying fiercely at one moment and in a state of utter freefall the next, knowing where to put your money can seem like an impossible task. Fortunately, the sheer number of different types of investments means that you can tailor a strategy that works perfectly for you.
Before you do anything with your money, though, you need to figure out your risk profile. If you are younger and can withstand temporary setbacks in the market, consider a high-risk/high-reward strategy. Conversely, conventional wisdom holds that those closer to retirement ought to take a safer, more stable approach to investing. Here are some long term investment options and strategies that you can utilize to set you up for financial stability.
When you think of investing, your first thought is almost undoubtedly investing in stocks. With the media attention and headlines surrounding various stock markets, it’s easy to get caught up in the buzz. That said, purchasing individual stocks is inherently one of the riskiest long term investment strategies. With the risk, though, comes perhaps the greatest potential for return; over long periods of times, the stock market has historically outperformed every other major type of investment.
So why shouldn’t you pick a few stocks and throw your money in? Unfortunately, stock picking is very, very hard to master and one of the main things to know before investing in the stock market. Besides determining if a company has a “good” business model, you need to evaluate their financial strength and think about a range of broader economic factors to invest wisely. If this interests you, then don’t be discouraged! Just make sure you spread out your picks over a wide variety of companies in different industries to properly diversify your holdings and reduce your risk. Picking stocks is a strategy better-suited for younger, risk-tolerant investors.
Exchange-Traded Funds, or ETFs, are investments that are very similar to stocks. Instead of dividing up a company into shares, though, an ETF takes any sort of underlying asset and divides its shares up for listing on exchanges. Those underlying assets can be pools of stocks, commodities, bonds, currencies, or even a combination of any number of those things. One big advantage of ETFs is that they can be traded on the open market, just like stocks.
So what exactly are ETFs and why are they useful? For one, ETFs can be a great way to diversify; there are ETFs that track the entire S&P 500, for instance. Additionally, ETFs allow you to invest in assets you otherwise wouldn’t be able. While they provide a great tool for the cautious investor, it’s incredibly easy to invest in something you know nothing about. If you take the time and effort to thoroughly research the ETFs you invest in, then they can be invaluable as a part of your long term investment options and strategies.
Mutual funds are very similar to ETFs in that they consist of a variety of assets bundled together for easy investment, but there is one key difference: mutual funds are, for the most part, actively managed by an investment professional. One big advantage of mutual funds is that you don’t have to constantly re-evaluate all of the positions in your investing portfolio—you have a professional take care of it for you. Another is that they are one of the types of investments that have the highest returns.
Another advantage of mutual funds is that, because they are actively managed and contain large swaths of assets spanning multiple asset classes, they are usually diversified and relatively safe as a standalone investment. Additionally, many mutual funds have set risk levels, so you can work with a financial planner to identify a mutual fund to suit your needs. Unfortunately, the flexibility and support comes at a cost as most mutual funds charge fees. Still, the ability to have a financial professional actively monitoring your investments can be invaluable. If you are on the risk-adverse end of the spectrum, you should strongly consider investing in a mutual fund.
When a company is looking to raise money, they either offer equity (stocks) or debt (bonds). Where equity is a representation of owning a portion of the company, debt is a promise to pay you cash in the future in exchange for your money upfront. It’s easy to think about bonds in much of the same way that you would think about an auto loan, mortgage, or other personal loan. Instead of the bank giving you money to buy a car in exchange for your promise to pay them back in a series of payments, you are giving money to a company in exchange for their promise to pay you back incrementally.
One of the redeeming factors about bonds is the relative stability of their cashflows. If you are holding an equity position, it can fluctuate dramatically. If you are holding a bond, you will receive those cashflows until the bond’s expiration date, or maturity. That being said, the market value of the bond fluctuates due to a variety of factors, so you could lose money if you sell before maturity.
Corporate Bonds and Treasuries
While there are plenty of different flavors of bonds, there are two main types of bonds that can be useful as a part of your long term investment options and strategies: corporate bonds and treasuries/municipal bonds. Corporate bonds, as the name suggests, are bonds issued by corporations looking to raise money. While corporate bonds generally pay more, be careful; corporate bonds are often much riskier. Treasuries are bonds issued by the US government, and, while they are considered virtually risk-free, the return is much less as a result. Much like you getting a lower rate on your mortgage for having a high credit score, companies get lower rates for having better credit ratings as well.
But should you invest in fixed income? If you are risk-averse and plan on holding a bond all the way until maturity, it can be an especially effective way to guarantee a cash flow while stripping out a lot of the potential of losing money on your investment. Similarly, treasuries can be a smart option for those looking for an alternative to holding a portion of the value of their portfolio in cash. For those looking for huge returns, your money may be better invested elsewhere.
Besides the major investment options we’ve covered so far, there are a number of other long term investment options and strategies. Perhaps the most popular alternative is real estate. For many, that means buying property and leasing it out; that strategy is incredibly effective as long as you can afford the mortgage payments should the unit be unoccupied. Many people faced bankruptcies due to unmet mortgage obligations in the Great Recession. While smart real estate investing is a lucrative endeavor, it’s imperative that you don’t overextend your finances.
If you’re looking to get involved with real estate at a low price point, consider investing in Real Estate Investment Trusts, or REITs. REITs are companies that own and operate a variety of properties, so investing in a REIT lets you put your money to work in real estate without the huge financial barriers to entry. Commodities such as gold, silver, copper, and oil provide interesting plays as well. While cryptocurrencies can dominate headlines, they are likely more of a short term play.
It’s All About Your Risk Appetite
Before you even begin to think about what you want to do with your money, you need to decide what you are reasonably comfortable losing. Investments are inherently risky, but some are considerably riskier than others. For those earlier on in life, it can be advantageous to take some risks—if you take some big losses earlier, you have plenty of time to make them back. Those who are close to retirement may be better served with a virtually-guaranteed stream of income. Regardless, figuring out which long term investment option or strategy is right for you starts with being realistic about your goals.