Table Of Contents
- 1 Long-Term Investments for Wealth Creation
- 2 Best Deals when It Comes to Long-Term Investments
- 3 Investing in Real Estate
- 4 1. Rental Real Estate
- 5 2. Real Estate Crowdfunding
- 6 3. Real Estate Investment Trust (REIT)
- 7 Investing in Long-Term Bonds
- 8 Investing in Target-Date Funds
- 9 Right Timing in Long-Term Investing
- 10 Final Thoughts about Long-Term Investments
Long-Term Investments for Wealth Creation
Long-term investing is more than capital preservation and leans more toward wealth building. When you think about the long-term, you are planning for something you will benefit from later in life, even though it may come sooner than you expect at times. However, your goal is to gain from it when your retirement years come.
It is a good goal, but it’s something that’s not easy to achieve. You need to strategize in ways that would build your wealth enough to provide high profits as you get older. When you think about long-term investing, you are allowing yourself to be more open in accepting risks in pursuit of the gains you will enjoy in the long run.
Long-term investments are typically attributed to investing in equities, including real estate and stocks. Both samples have high promises for capital appreciation. These are the kinds of investments that must comprise the majority of your long-term investment portfolio.
Capital appreciation will boost your portfolio income as time goes by. Depending on many factors, you may get double-digit returns or even higher, including how you played your investing cards.
On the other hand, the best scenario you can experience in investing for security is minimal added points per annum.
Best Deals when It Comes to Long-Term Investments
Here’s a look at the highly recommended investment deals you will benefit from in the long run:
Investing in the stock market is highly recommended for people who want long-term gains in their investments. You can also enter if you are a newbie in investing and want to gain experience while putting your money into something with a higher promise of growth.
The beginning is always the most confusing part of any investment. The first thing you need to know about the stock market is that it is comprised of exchanges. Some samples include the Nasdaq and New York Stock Exchange, where you can find specific listings of the stocks.
Stocks work by bringing sellers and buyers together to act as a market for the stock shares. The price of each stock depends on the exchange tracks of the demand and supply.
To make it easier for you to understand what kind of investment is, you will purchase a company’s stock depending on your budget and how much you are willing to invest. It is like buying a small piece of the company. The piece you have purchased is referred to as a share.
You will take a risk in companies by choosing the ones you feel will go up in value. The more a company invests in its stocks, the higher the chances its value will increase. Once the stock you have invested in has increased in value, you can sell it for profit.
Companies issue stocks to attract business investors and gather funds that they can use to expand or grow. As an investor, you will buy stocks to raise your money and rise above inflation through the years.
By owning a company’s stock, you become a shareholder since you will have shares in the company’s profits. The higher your investment is, the higher your gains will be.
Public companies resort to a stock market exchange when they want to sell their stock. To buy and sell the shares as an investor, you will need to go through a stockbroker. The price of a stock is affected by its demand and supply. Therefore, it can experience fluctuation throughout the day. When it happens, most investors could only hope for the value of the stock to increase over time.
However, such optimistic hope for stock or company to increase in value doesn’t materialize all the time. As a result, the company may lose its value or, worse, may run out of business.
As an investor, you will also lose part or all of your investments when it happens. To ensure that you won’t lose all your investments at once, you must not focus on one company but spread your investments to different companies.
There are also mutual funds that many retirement plans sponsored by employers get. You may already own stock but are not aware of it. If you have a 401(k), your company has included stock shares in your retirement plan.
Here are some of the advantages of investing in stocks:
- You can put your money across global borders
- You can spread your money by investing in different industries and companies
- Most of these stocks as liquid, so you can quickly sell them to earn fast
- The value of most stocks appreciates on a long-term basis
- It’s like investing in the economy since you will have a share of ownership of companies that generate profit
- You are not required to manage an actual business or property when you buy stocks since they are paper investments
How Do You Make Money in Stocks?
While investing in stocks has risks, it also has a high potential of gaining more, especially in the long run. You will earn from it in different ways. One way is dividends which are regular payments sent to shareholders every quarter. It is important to note, though, that not all kinds of stock investments pay dividends. Another possibility is selling, and you can immediately share a stock for a price way higher than what you have paid for it immediately after the stock price goes up.
The Basics You Must Know about Stocks
Spend time researching the stock before making a purchase.
You have to be wise with your investment, no matter how little or high the amount you will put on it. You need to know more about the financials and bones of the company. Some investors avoid the long process of investing by opting to invest in stocks through ETFs, index funds, and equity mutual funds.
The three said options make it possible for you to transact once to buy many stocks. Aside from a shorter time of legwork, this option also offers instant diversification.
Be a wise investor by thinking about the long-term.
Many of those who have succeeded in stock investing has mastered the long-term buy and hold. They invest in many kinds of stocks, making their portfolio diversified, and they hold onto them whether the financial times are good or bad.
You can focus on the two main types of stocks as a newbie: preferred and common.
Preferred stocks pay dividends on a fixed schedule. In this case, you are guaranteed to receive something annually. When you own this kind of stock, you are at the front line of the company’s earnings. You will get your share of the distributed excess cash from the company if it earns.
On the other hand, if the company files for bankruptcy, you will liquidate assets as a preferred stock owner earlier than those who own common stocks.
Most investors in a public company typically own common stocks. This stock pays dividends, but they are not fixed, so there is no guarantee of the amount and when you will get them.
The major market indexes mainly influence your stock trading decisions. This is when people refer to the market as being up or down. The market index monitors how a group of stocks is performing.
How to Invest?
Here’s to give you an idea of the potential earnings in the stock market.
Suppose you’ve started investing 50 years ago in the S&P 500 index with an initial investment of $10,000. Your money would be around $1.2 million at present. The dollar return proves that stock investing is effective in building wealth on a long-term basis.
After learning about the basics, here is a brief guide on how you can begin investing in stocks:
- Choose how you would want to begin
Here are the different ways to invest in stocks:
- Individual stocks – This is only recommended to investors who have the desire and time to regularly spend thorough research and evaluate their investments. This active approach can help you beat the market quickly as long as you are patient and wise.
- Index funds cost lower than individual stocks, and the underlying indexes give you a virtual guarantee of long-term performance. For example, the S&P 500 can produce annual total returns of 10 percent, guaranteeing a wealth buildup through time.
- Robo-advisors – This brokerage that has become popular in recent years works by investing your money in the index funds portfolio based on your goals, risk tolerance, and age. It performs the investing on your behalf, automatically implements changes if needed, maximizes your tax efficiency, and chooses your investments.
- Come up with a figure
You have to decide how much money you are willing to invest. To help you think about it, you must first assess your finances. Ensure that you don’t invest the amount of money you will need in the next five years.
You have to consider the short-term consequences of the action. With too many uncertainties in this regard, especially when a problem hit the world, as in the case of the Covid-19 pandemic, the market can plunge way more than usual and experience a rebound after several months.
Never invest in stocks money you will allocate in the following:
- The money you are saving for your down payment for assets you plan on buying
- Your vacation fund for next year
- The money you have saved for your children’s tuition fees
- Your money intended for an emergency fund
What can you invest in stocks then?
Think about the money you have that you are sure you won’t be needing in the next five years you can consider as your investable money. This thinking process about how much and what money to invest in stocks is called asset allocation.
Many experienced investors start by subtracting their age from 110. The result is more or less the percentage of the money you can invest in stocks, including stock-based ETFs. You can put the remaining percentage in fixed investments, such as high-yield CDs or bonds. You can then adjust the percentage allocation depending on the level of your risk tolerance.
- To buy stocks, you need to open an investment account
An investment account also is called a brokerage account, a specialized type of account offered by various companies. It is typically a quick process that can be done within minutes. You can put funds on the account by wiring money, mailing a check, or performing an ETF transfer.
While opening a brokerage account is easy, you must think hard about the type you need before proceeding. You can choose between IRA or an individual retirement account and a standard brokerage account if you are new. They will both allow you to buy ETFs, mutual funds, and stocks.
How do you choose?
Well, the type of account you must open depends on your investing goals. If you are aiming for an investment that you will benefit from when you reach your retirement age, it is recommended to open an IRA.
On the other hand, the standard brokerage account is suited for investors who are only investing in case of an immediate need and would like easy access to their money.
- Choose the stocks where you will invest your money
You must invest in different types of companies—your first step towards learning the concept of diversification in stock investing. However, you have to be careful and avoid becoming a victim of too much diversification.
You should stick with businesses you are familiar with. You can, later on, branch out to investing in other companies after you have grasped the flow of things in this kind of venture.
Remember the following pointers if you are a beginner:
- Always learn the concepts and metrics necessary in evaluating stocks
- Avoid penny stocks as much as possible
- Do not plunge into high-volatility stocks while you are still gathering experience
- Start investing in the businesses you understand
- Diversify your investment portfolio
- Keep on investing.
Investing in Real Estate
You may already know that the easiest way to invest in real estate is by owning a home. You can pay a 3 percent down payment when buying an owner-occupied home. In this case, you can prepare a $6,000 down payment to afford a $200,000 worth of a house.=
Buying your own home is both an investment and a way to provide your family with shelter and comfort. In addition, this kind of property will have half of its mortgage paid after 20 years.
There are various ways you can invest and earn in real estate. Here are some of the most popular and profitable:
1. Rental Real Estate
Make sure that you have searched everything about property investing before buying a rental property. It’s a sound investment, but since you will risk a lot of money to invest, it is better to know as much as you can before signing any deals.
Here are the critical factors to ask yourself and think about before buying a rental property:
Are you a handy type of person?
This question is crucial since you will be a landlord, and it will be your responsibility to fix issues on your property. While you can always call on a hired help to do things for you, this would mean a deduction to your total earnings. You should also have a lot of spare cash you can use whenever you are required to take any action about any problem in your rental property.
Make sure you can afford the down payment.
Rental properties require a higher down payment than an owner-occupied home. Since you aren’t allowed to get mortgage insurance on rental properties, you will be asked to pay at least 20 percent as a down payment.
However, you don’t have to get the whole amount from your quick cash. Instead, you can try applying for a personal loan through bank financing.
Clear your debts
Some experienced investors include debt in their portfolio investment strategy. However, you must avoid the technique, especially when you are new and you get average earnings. Before pushing to own a rental property, you must first ensure that you don’t have kids in college, unpaid medical bills, or student loans.
You need to practice cautiousness when it comes to this kind of investment. You must assess your finances first and foremost. You can’t pursue the decision if it will only increase your debts at levels you will have difficulty paying off.
Meanwhile, you may want to close the deal if the potential earning of the property is way beyond the total cost of your debt.
Ask yourself if it is better to finance the property or buy
The answer to this question depends on your goals and capability to pay. You will receive a steady monthly cash flow if you pay in cash. For example, you can expect a 9.5 percent return on a property priced at $100,000 you paid in cash.
However, you might get higher returns if you opt for financing. While the monthly cash flow is expected to be lower, the annual gains would be more significant than the expected amount when you pay in cash.
Choose a good location.
A rental property will only be profitable if it is situated in a good location. A good location has a growing population and shows the potential of developing and improving. You have to prioritize areas with a growing job market, easy access to public transportation, and a low crime rate.
It is a plus near amenities, including malls, parks, movie theaters, and restaurants.
2. Real Estate Crowdfunding
At this moment, popular demand crowdfunding is real estate-focused but has certain similarities to peer-to-peer lending. It allows you to choose the method you will use in property investments, although it mainly comprises commercial real estate.
With this kind of crowdfunding, you can choose the real estate investments you want to put your money into and your investment amount.
Initial investment doesn’t need to be high. It depends on the platform you’re using. For example, you can invest as low as $500 in Fundraise and get an average of 14 percent per annum returns. The platform allows you to participate even when you are not an accredited investor.
However, many other platforms require a high net worth and income to become an accredited investor. While this requirement may not suit all, those who can afford such platforms will get higher gains from the venture.
3. Real Estate Investment Trust (REIT)
A REIT is a company that allows investors to put their money in real estate that generates income. So if you want to access real estate, you can have share ownership by buying REIT shares. Once done, you can add the REIT to your portfolio.
Your advantage as an investor is that you are given access to all the properties owned by the REIT. To date, it is estimated that around 87 million people own REIT shares in America alone.
A Brief Background about REITs
REITs date back to the time of US President Eisenhower in the Cigar Excise Tax Extension of 1960. They were initially offered to make it easier for ordinary investors to invest in income-producing real estate in ways they can afford.
REITs have specific operating requirements required by law.
For one, they need to have at least 75 percent of all their assets invested in real estate. Second, at least 75 percent of their gross income must come from sources related to real estate, and last, at least 90 percent of the income they derive from real estate investments must be distributed to their investors.
The Basics about REITs
Investors can start buying REIT shares in many ways on a fund that has qualified as a REIT. REITs fall under these three classifications:
- The focus of the real estate sectors (industrial or healthcare REITs)
- The trading schemes implemented with their shares (non-listed or exchange-traded REITs)
- The kinds of investments they deal with (debt or equity)
The idea here is to invest your money similarly with stocks. There is an underlying estate in which you will buy into the trust. This will make you a part-owner and gain profits from the real estate’s profits.
Your earnings will come from equity ownership or mortgage financing. You will know that the properties are commercial when there are equities involved. Commercial real estate can be large apartment complexes, industrial spaces, warehouses, retail, or office space.
You don’t need a considerable amount of money to start investing in commercial real estate and gain from the professional management of the process.
REITs have close similarities to paying stocks with very high dividends. It’s also a good thing that investors can buy or sell their position whenever they want. REITs are high-yielding, and one of the most recommended when thinking about long-term investments in a well-balanced portfolio.
Investing in Long-Term Bonds
Long-term bonds pertain to the US Treasury’s offering of the longest maturity bond. You can choose from a 10-year and 30-year bond, and in 2020, a 20-year bond also became available. The risk in this kind of investment is low since the US Treasury backs the bonds.
A long-term bond can also refer to the most extended maturity being offered by an issuer. For example, corporate bonds vary from 15, 20, and 25-year bonds. This is the difference between corporate and Treasury’s long bonds. Corporate bonds are available in a range of variations.
The US Treasury’s long bonds are considered the most actively traded bonds worldwide and the safest securities available. The gains you can expect from these bonds come from the payment of the government to be able to borrow funds from investors.
Regarding yield curves, long bonds sustain an average ratio when the economy is healthy than short-term bonds. This is because long bonds also have a fixed interest rate over a period. However, longevity also poses a risk as you become more vulnerable to it as the interest rate increases over a long period.
The bond prices typically go down when the interest rates go up, the reason why you will get higher yields in new bonds than the existing ones. As an investor, you will make less from your owned bonds as the rates increase. Bond price falling in the secondary market decreases the bond’s worth in trading.
You will get a higher compensation when you buy long-term bonds since they come with a risk of decreasing value through time, which you are willing to take if you agree on the investment.
The bond market is categorized into five:
- High-yield junk bond
- Intermediate-grade bonds
- Investment-grade bonds
A high-yield junk bond offers a higher yield than the other bonds in the list since it also has the highest risk. In addition, it offers its investors additional compensation due to the more extended maturity date of the bond.
Investing in Target-Date Funds
These funds are preferred by those who are not interested in managing their investment portfolio. As you become older, the funds become more conservative, so your portfolio is kept safe even as you near retirement age when you need to gather gains from your investments.
Your target date is your retirement years, and the funds move from being aggressive to becoming conservative through time.
While you can buy these funds, they are popularly included in many companies’ 401(k) plans. When you opt to buy the funds, you will choose the date of your retirement, and the funds will work according to how many more years are left before the date.
These funds have similar risks to bonds and stocks since they are a combination of these two. The farther your target date is, the more volatile the funds will be. However, the funds will also suffer from fewer fluctuations with lesser gains as you get nearer your retirement year.
Right Timing in Long-Term Investing
If you have chosen to invest in something, such as the stock market, you may be thinking about the best time to do it. If you intend to make this a long-term goal and want to diversify your portfolio, anytime makes an excellent time to plunge into investing. The duration that your investment stays in the market becomes more important than the timing when you invest.
Over time, the market is expected to rise about 10 percent per annum. More returns on your investment the longer you keep them on board. Despite this, you must also learn how to strategize. It is not recommended to put all your money in the stock market at once. Instead, it is wiser to keep adding more money each week or each month.
To ensure that you won’t buy stocks at a price that’s way too high, you need to learn the dollar-cost averaging kind of strategy.
You may already be using this strategy but are not aware of it. A good example is when you regularly invest in your 401(k) account sponsored by your employer. The investment comes from the money added to your investment for your every paycheck. Long-term investing works – valuing the investing discipline and implementing a regularity in the process.
Final Thoughts about Long-Term Investments
When you enter long-term investments, you must prepare yourself for the changes in the market, especially in the beginning. You must not be scared of the changes, and they must not dictate your decision to sell either. Long-term investments offer more gains that you can only benefit from when you reach your retirement age. For people who are uncertain how to support themselves once they retire, this may be an option. The investments will make it easier for you to decide what to do, and you may also opt to add more investments, like rental properties, after you have collected your funds.
To be assured of better gains from the funds when you retire, you must stop yourself from selling your shares whenever the market experiences a downtime.
When you are keen on what will happen in your investments, in the long run, you won’t get too bothered by the changes in the market from time to time. You can leave the constant worrying to short-term traders since they rely on the market’s movement all the time to improve their strategies. You can also use autopilot to invest your money regularly so that you can focus more on your work and leisure.
Even novices can make good decisions when it comes to long-term investments. First, make sure that you are interested in the industries, companies, or assets you are putting your money . Second, you have to be ready to take the plunge without sacrificing your daily finances and immediate needs.
Finally, once you have started investing long-term, focus your efforts on building your wealth and enjoying the process as you go.