10 Best Long-Term Investments for 2023

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Securing your financial future through investment is crucial, and long-term investment is a key strategy. In recent years, the temptation to seek short-term gains may have been strong, but it's more important than ever to focus on long-term investing and stick to your plan.

Today's investors have a variety of investment options with varying levels of risk to fit their needs. From low-risk options like CDs to higher-risk, higher-return investments like stocks, mutual funds, and ETFs, there's something for everyone.

According to a recent Bankrate survey, stocks and real estate are the top two choices for long-term investments by Americans. Both of these options are included in the list below.

Top long-term investments in January 2023

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1. Growth stocks

Overview: Growth stocks are the high-performance vehicles of the stock investing world, offering high growth and potential for high returns. These stocks are frequently from tech companies, but not always.

They reinvest their profits in the business, so dividends are rare until growth slows.

Who are they good for?: Analyzing individual growth stocks requires careful research and a lot of time.

Due to their volatility, these stocks are suitable for those with high risk tolerance or a commitment to holding for at least three to five years.

Risks: Growth stocks can be risky as investors may pay high prices relative to the company's earnings.

In a bear market or recession, these stocks can experience a rapid drop in value, losing their popularity quickly. Despite this, growth stocks have been strong performers over time.

Rewards: If you find the right company, the rewards of investing in high-growth companies like Alphabet and Amazon, some of the world's largest companies, can be substantial.

Where to find: They can be purchased through any online broker offering stock trading.

2. Stock funds

Overview: A stock fund is a group of stocks, often classified by theme or category like American stocks or large stocks. The fund company charges a fee for this product, which can be low.

Who are they good for?: For those who don't have the time or desire to analyze individual stocks, a stock fund (ETF or mutual fund) can be a great option.

Stock funds are ideal for investors who want to invest aggressively in stocks, but do not want to make it a full-time hobby.

Risks: Stock funds are less risky and require less effort compared to buying individual positions.

However, they can still experience significant fluctuations in a single year, potentially losing up to 30% or gaining as much as 30%.

If you invest in a fund that is not well diversified, for instance a fund focused on a single industry, it will have less diversification than one based on a broad index like the S&P 500. Hence, if you invest in a fund based on the chemical industry, it may be highly impacted by oil prices. If oil prices increase, many of the stocks in the fund may decrease in value.

Benefits of Stock Funds: Stock funds are easier to manage and track than individual stocks, but offer more stability due to their broad portfolio of multiple companies. These funds have the potential for good returns and can be bought through online brokers that offer ETFs and mutual funds. A broadly diversified fund such as S&P 500 or Nasdaq-100 gives you a mix of high-growth and other stocks for a more secure investment. By investing in a stock fund, you receive the average return of all companies in the fund, making it less volatile compared to holding a few individual stocks.

3. Bond funds

Bond Funds Overview: Bond funds, either as mutual funds or bond ETFs, consist of bonds from different issuers. They are classified based on factors such as the type of bond, risk level, issuer (corporate, government, municipality), and others. Bonds pay a fixed interest rate annually, and at the end of their term, the issuer returns the principal amount.

Ideal for: Bond funds are suitable for investors who want a diverse bond portfolio without analyzing and purchasing individual bonds. They are also a good option for individuals who do not have enough money to buy a single bond, which usually costs around $1,000. Bond ETFs can often be bought for less than $100, making them a more accessible option.

Risks of Bond Funds: Although bonds can fluctuate, bond funds tend to remain stable, albeit with some sensitivity to changes in interest rates. While bonds are considered safer compared to stocks, their issuers vary in risk levels, with government issuers (especially federal) being less risky and corporate issuers ranging from low to high risk.

Rewards of Bond Funds: Bonds and bond funds can be secure investments. Bond funds, in particular, offer diversification through a portfolio of multiple bond types from different issuers, reducing the impact of any one bond default. Bond funds typically yield lower returns compared to stock funds, around 4-5% annually, with government bonds having lower returns. Despite the lower returns, bond funds offer a lower risk investment option.

Availability: Bond funds can be bought through online brokers that offer ETFs and mutual funds. There is a variety of bond funds to choose from to meet different investment needs.

4. Dividend stocks

Dividend Stocks: Dividend stocks are like sedans in the stock market, offering stable returns compared to the more rapidly growing sports cars of growth stocks. Dividend stocks are stocks that pay regular cash dividends, typically found among established and mature companies.

Dividend stocks appeal to older investors, who value a steady income source and benefit from growing dividends over time, higher than the fixed payouts from bonds. Real Estate Investment Trusts (REITs) are a popular form of dividend stocks.

Suitable for: Dividend stocks are ideal for long-term, buy-and-hold investors seeking lower volatility and a steady cash flow.

Risks of Dividend Stocks: Despite being less volatile than growth stocks, dividend stocks can still experience significant price swings, especially during market downturns. However, mature and established companies that pay dividends are generally considered safer than young, fast-growing companies.

If a dividend-paying company experiences a drop in earnings and cannot afford to pay its dividends, it may reduce its payout, leading to a potential decrease in its stock price.

Benefits: The main advantage of dividend stocks is their cash payout, with some top companies offering 3 to 4% annually or more, and the possibility of increasing payouts by 8 to 10% per year for extended periods. This provides a yearly raise for the investor.

Although the returns from dividend stocks may not be as high as growth stocks, investing in a dividend stock fund provides diversification across a range of stocks.

Where to Invest: Dividend stocks can be bought through any online broker offering stock trading.

Read More: 25 Best Ways to Make Money From Home (2023)

5. Value stocks

Overview: In a bull market, many stock valuations can become high, leading investors to seek out value stocks as a defensive strategy while still aiming for attractive returns.

Value stocks are stocks that are considered cheap based on various valuation metrics such as the price-earnings ratio, which measures how much investors are paying per dollar of earnings. These stocks are different from growth stocks, which usually grow faster and have higher valuations.

Who are they good for?: Value stocks can be appealing to investors, as they tend to perform well during rising interest rate environments. This is especially relevant now, as the Federal Reserve has been increasing interest rates rapidly.

Value stocks generally have lower downside risk, meaning they tend to decline less in the event of a market decline. However, they still have the potential to increase in value if the market rises.

Value stocks have the potential to experience faster growth compared to non-value stocks if market conditions become favorable, leading to an increase in their valuations. This combination of lower risk and potential for higher returns is what makes value stocks attractive to investors.

Additionally, many value stocks offer dividends, providing additional returns.

You can buy value stocks through any online brokerage that offers stock trading.

6. Target-date funds

Summary: Target-date funds are a convenient choice if you prefer not to manage your investments. As you grow older, these funds become more cautious, ensuring your portfolio is secure as you approach retirement and need the money. The funds gradually transition investments from high-risk stocks to low-risk bonds closer to your retirement date.

Availability: Target-date funds are frequently offered in workplace 401(k) plans, but can also be purchased outside of these plans. Simply select your retirement year and the fund will handle the rest.

Risks: Target-date funds carry similar risks to stock and bond funds, as they are essentially a combination of the two. If your target date is far into the future, the fund will have a larger allocation to stocks, leading to higher volatility. As the target date approaches, the fund shifts towards bonds, reducing volatility but also lowering returns.

Additionally, as a target-date fund becomes more bond-focused over time, it may underperform the stock market to a larger extent. This trade-off of lower risk for lower returns is a consideration for investors.

Rewards: To mitigate the risk of outliving your savings, some financial advisors suggest purchasing a target-date fund with a retirement date that is 5-10 years later than your actual retirement plans, to take advantage of the potential for increased returns from stocks. The returns of a target-date fund are determined by the underlying investments. A higher stock allocation will generally lead to higher long-term returns, while a higher bond allocation results in lower long-term returns.

Availability: Target-date funds can be purchased through most online brokers that offer ETFs and mutual funds.

7. Real estate

Summary: Real estate is a classic long-term investment that requires a substantial amount of capital, comes with high fees, and usually generates returns over many years rather than a short period.

Investing in real estate can be attractive due to the ability to finance the majority of the investment with a loan, which can be repaid over time.

Suitable for: Real estate investing can be a good fit for individuals who want to be in control of their investments. Property ownership offers the chance to be self-employed, and there are various tax benefits for property owners.

Note: Despite being commonly viewed as a passive investment, real estate may require significant active management, especially if the property is rented out.

Risks: Borrowing a large sum of money increases the risk of the investment not performing well. Even if you purchase real estate with cash, having a significant amount invested in one asset can be problematic and lack of diversification can create problems if something happens to the property. In addition, if the property is not rented out, you need to pay for mortgage and maintenance costs out of pocket.

Rewards: Despite the potential risks, real estate can offer high returns if a good property is selected and managed properly. If the property is held over a long period, the returns can be substantial. Moreover, paying off the mortgage on a property can lead to stability and cash flow, making it an attractive option for older investors.

Where to find: Real estate can be purchased through a licensed real estate broker.

8. Small-cap stocks

Overview: Small-cap stocks, which are stocks of smaller companies, are attractive to investors due to their potential for quick growth or tapping into emerging markets. For example, Amazon started as a small-cap stock and generated substantial wealth for those who held on to the stock.

Although small-cap stocks are frequently high-growth stocks, it's not always the case.

Who are they good for?: For those willing to do the necessary research and analysis, small-cap stocks can be a valuable source for finding undiscovered stocks.

However, these smaller firms tend to be more unstable than larger, established companies, requiring investors to have a high tolerance for risk.

Risks: Small-cap stocks carry higher risks than larger, established companies due to factors such as limited financial resources, restricted access to capital markets, and weaker brand recognition. Their high growth potential can lead to high valuations, making them vulnerable to rapid drops during market downturns. They tend to be more unstable and have greater business risks, making them unsuitable for investors who cannot handle market fluctuations. Analyzing individual small companies also requires time and effort, so small-cap investing may not be suitable for everyone.

Rewards: Investing in a successful small-cap stock can yield significant returns, potentially 20% or more annually for years, if you are able to identify a hidden gem such as Amazon before its potential success is widely recognized.

Where to buy: Small-cap stocks can be bought through any online broker that offers stock trading.

9. Robo-advisor portfolio

Overview: Robo-advisors manage investments by automatically allocating your funds based on your goals, time horizon, and risk tolerance. After filling out initial questionnaires, the robo-advisor builds a portfolio by selecting low-cost ETFs. The service is charged through a management fee, usually around 0.25% annually, and the cost of the funds in the account, which typically ranges from 0.06% to 0.15%. This translates to approximately $6 to $15 per $10,000 invested.

At its best, a robo-advisor can provide you with a well-diversified investment portfolio that meets your long-term investment needs.

Who are they good for?: Robo-advisors are ideal for individuals who prefer to leave investing to professionals and do not wish to actively manage their investments.

The level of risk can be adjusted to fit your preferences, whether you prefer a stock-heavy or a more conservative portfolio. Leading robo-advisors such as Wealthfront and Betterment also offer options for a primarily cash or savings account-based portfolio.

Risks: The risk associated with robo-advisors is largely dependent on the investments made. If a portfolio consists mostly of stock funds, it may experience more volatility than if it were primarily composed of bonds or cash savings. Thus, the risk is largely determined by the type of investments held.

Rewards: The rewards from a robo-advisor account vary based on the investments and can range from substantial returns with a stock-heavy portfolio to lower returns with a more conservative portfolio of assets like cash in a high-yield savings account.

A robo-advisor usually creates a diversified portfolio for stability in annual returns, although this may result in a slightly lower overall return.

Where to buy: There are several robo-advisors available to open an account with. Here are the top-rated robo-advisors.

10. Roth IRA

Overview: A Roth IRA is a highly advantageous retirement account. It enables you to save money after paying taxes and then grow it tax-free for many years. You can also withdraw the funds tax-free and pass them onto your beneficiaries tax-free, making it a desirable option compared to traditional IRAs.

Who is it suitable for?: A Roth IRA is an excellent choice for anyone who earns income and wants to accumulate tax-free assets for retirement.

Risks: A Roth IRA is not an investment, but a type of account with tax and legal benefits. You can invest in a variety of options through the best Roth IRA brokerage, but if you prefer a secure and guaranteed income, an IRA CD might be the way to go. IRA CDs are a type of investment inside an IRA, allowing you to accrue interest tax-free. There is low risk of not receiving your payout and principal at maturity, making it a safe investment option, though it's important to consider the impact of inflation.

Benefits: If you're seeking a higher return, you can invest in stocks and stock funds within a Roth IRA and enjoy tax-free growth. However, investing in these assets also comes with higher risks.

Available at: You can open a Roth IRA account at a brokerage firm or robo-advisor. Here are some of the top brokerage options for Roth IRAs.

Read More: how to invest in stocks

Essential rules for long-term investing

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Long-term investing is key to financial stability, but following guidelines is crucial.

Understand the risks of your investments

Invest with Awareness of Risks Investing to earn higher returns typically involves taking on more risk. Safe investments such as CDs generally have low returns, while medium-risk assets like bonds tend to offer higher returns, and high-risk stocks offer the highest returns. To achieve a higher return, it usually requires taking on more risk.

Though stocks in general have a strong history of performance, such as the 10% return of the S&P 500 over long periods, stocks are also well-known for their fluctuations. A stock's value can fluctuate 50% within a year, either up or down. Some safer investments are a better option for short-term gains.

Pick a strategy you can stick with

It's crucial to understand your risk tolerance and ability to handle market fluctuations when considering investments with the potential for higher returns. Avoid making impulsive decisions, such as selling when your investments decrease in value, as it could lead to missing out on potential future gains.

Understand your investment strategy to increase likelihood of staying committed during unfavorable times. No investment strategy succeeds all the time, so concentrate on the long-term and maintain your plan.

Know your time horizon

Lowering Risk by Committing to a Longer Holding Period: Committing to hold your investments for a longer period can actually reduce your risk. The longer holding period allows you to weather market ups and downs. 

Although the S&P 500 has a strong historical record, returns are achieved over time and the index can experience substantial decline over a short period. Therefore, investors should be prepared to keep their investments for at least three to five years, with longer being better. 

For those unable to do so, short-term investments such as a high-yield savings account may be a better fit. Taking a long-term approach to investing also allows you to set a plan and not constantly worry about short-term market movements.

Make sure your investments are diversified

Diversification is crucial in investing as no strategy works all the time.

Index funds offer an easy and low-cost way to diversify your portfolio. They enable you to invest in a wide range of companies that are categorized by factors such as size or location. By holding a few of these index funds, you can quickly diversify your portfolio.

Investing all your money in one or two stocks may seem tempting, but a diversified portfolio is less risky and can still deliver solid long-term returns.

Is now a good time to buy stocks for the long term?

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Investing in the stock market is generally considered a good move if you have a long-term perspective and have diversified your portfolio. This is because the market has a tendency to rise over time, and being invested for the long-term is more critical than timing the market perfectly. Historically, the S&P 500 index has shown an average annual return of around 10% over the long term, so the longer you stay invested, the more of that return you are likely to receive.

However, it's not advisable to invest all your funds into the market immediately. The market can experience significant short-term fluctuations, so it's safer to invest regularly, whether it's weekly or monthly. This way, you can benefit from dollar-cost averaging, which helps you avoid overpaying for investments.

For instance, if you contribute to your employer's 401(k) plan with each paycheck, you are already practicing this strategy. Consistent and disciplined investing is crucial for long-term success.

While investing for the long-term is always a good idea, it can be particularly beneficial during market downturns, such as recessions, when stock prices have dropped significantly. This provides an opportunity to buy stocks at a discount and potentially receive higher returns in the long run. Nevertheless, many investors become too scared to invest during market declines, missing out on potential bargains.

That's why investing consistently through both good and bad times is advantageous. You can continue to add to your investments even when prices are low, potentially securing a deal. But this requires prior planning and having an open and funded brokerage account.

Why are long-term investments good?

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Investing for the long-term offers the potential to earn higher returns than short-term investments, but it requires a commitment to a long-term perspective and the discipline to hold onto your investments even during market dips and the temptation to sell for a quick profit.

By focusing on the long-term, you can avoid being swayed by short-term market noise that often discourages many investors. For instance, investors in the S&P 500 who held on after the major drop in 2020 were able to weather the short-term market turbulence brought on by the COVID-19 pandemic, and eventually saw their investments grow as markets rebounded.

Long-term investing also eliminates the need for constant market monitoring that short-term traders need to do. You can set up automatic regular investments and focus on your passions instead of worrying about market movements.

Bottom line

Long-term investing is a proven method for accumulating wealth over time. The key to success is adopting a long-term mindset and avoiding excessive market analysis.

If you seek professional assistance with your investments, consider using a well-known robo-advisor such as Betterment or Wealthfront.

Read More: How to Invest in Real Estate

Source: https://www.bankrate.com

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