eBusiness Weekly
Blessing Nyatanga
The best long-term investments include stocks, funds, bonds and alternative investments.
Some of these investments, like stocks, typically comprise larger portions of an investment portfolio than other asset classes, but each one of these investment types could make sense to include in your portfolio, depending on goals and risk tolerance.
Stocks
It is prudent that investors consider exposure to stocks as a long-term investment. Investing in the stock market is a way to buy ownership of a fraction of a publicly traded company. Stocks can be bought via an investment account or taxable brokerage account through an online brokerage, a trading app or via a financial advisor.
Owning stocks comes with risks. An individual stock’s price can dramatically fall if the company performs poorly or if investors lose confidence in its future, so experts advise owning stocks across multiple industries, stocks of companies of different sizes, and both US and international stocks to reduce your risk.
Even diverse stock portfolios can be susceptible to significant losses, but over the long run, stocks typically recover from downturns and have produced impressive returns over time. The average annual return of the S&P 500 index, which includes stocks of many of the largest US companies, is about 10 percent.
There are lots of different types of stocks, but these are some options:
Growth stocks
Investors usually pay a higher price to buy growth stocks, which are stocks of companies that are expected to grow at a significantly faster rate than average. While a growth stock’s price may appear high, investing can pay off if that company increases its profits over time and its stock price increases.
Growth stocks have the potential to produce higher returns than other stocks, which is why they can be good long-term investments, but they can also be risky because their prices are based on anticipated growth that isn’t guaranteed to come to fruition.
Advantages
Potential for massive returns
Disadvantages
Normally don’t pay dividends
Can be volatile
Dividend stocks
Some companies attract investment by regularly sharing profits with investors. These payments are called dividends and are usually paid in cash on a quarterly basis, though dividends sometimes come in the form of additional stock. Companies that pay dividends typically aren’t businesses growing at a fast rate, since fast-growing companies will often choose to reinvest earnings.
Like all other stocks, the share prices of dividend stocks fluctuate, so long-term investors who buy them are usually hoping to see the stock price grow while they benefit from dividends. Dividend stocks are generally considered safer investments than growth stocks, but that’s not always the case.
Pros
Regularly share profits with investors
Cons
Companies that offer dividends may grow at a slower pace
Dividends are taxable
Value stocks
As opposed to growth stocks, value stocks normally trade at lower prices relative to these companies’ business fundamentals like earnings, and they’re often issued by more mature companies. Many value stocks pay dividends, albeit not all.
Value stocks can be good long-term investments because they often come from fairly stable companies, and the returns they generate can add up over long periods of time.
Advantages
Often pay dividends
Stock prices can rise significantly over time
Disadvantages
Value stocks can be hard to identify
Generally have less upside potential than growth stocks
Funds
Funds enable investors to spread out their risk by investing in a combination of securities, as opposed to just one. Investing in funds can help you diversify your portfolio without spending much time selecting individual stocks and bonds. Investing of funds can be done through purchasing directly from the company before investing in funds, it is imperative to understand what’s in them, how they’ve performed in the past and what fees they charge.
Stock funds
These are funds that invest primarily in stocks. Types of stock funds include mutual funds, which are usually professionally managed by investment advisors, and exchange-traded funds (ETFs), which often track an index, like the S&P 500.
Advantages
Most stock funds have typically generated high returns over time
Can help investors diversify
Disadvantages
Fees may apply
You can’t decide which stocks are included
Bond funds
A bond fund entails pooled investment in a plethora of bonds. Bond funds are considered reliable investments than other assets, which makes them attractive for risk-averse long-term investors albeit they come with risk. There are junk corporate bond funds that offer more upside than other bond funds although they are of lower quality and are more vulnerable to bond issuers defaulting.
Advantages
Can assist investors to diversify
Considered to have lower risk than stock funds
Disadvantages
Typically lower returns than stock funds
Fees may apply
Bonds
Purchasing bond entails loaning money to the government or a company and earning interest in return. The rate of annual interest an investor earns from a bond is the coupon rate.
Bonds have maturity dates, which is when the principal (the amount initially invested) is paid back to the investor. The price of bonds can fluctuate and change over time, albeit investing in bonds is often considered less risky than investing in stocks.
When interest rates fall, bond prices typically go up, and the opposite is true. That’s because bonds pay a fixed rate, so they’re more valuable when their rates are higher than those of newly-issued bonds.
However, there’s a risk that comes with bonds and that high inflation. Inflation rates can sometimes outpace the returns offered by bonds. Below are various types of bonds with their advantages and disadvantages.
I bonds
The Series I Savings Bond is offered and backed by the federal government. It’s considered a safe investment that protects against inflation. The main way to buy I bonds is through the Treasury Department website.
Investors could make money with I bonds from their fixed interest rate and from their variable interest rate, which is adjusted every six months based on inflation. After five years, I bonds can be redeemed with no penalty.
Advantages
Act as a hedge against inflation
Considered risk-free
Disadvantages
Have lower returns than other assets
Early withdrawal penalties
Treasury-inflation protected securities (TIPS)
TIPS are also Treasury-issued government bonds that are designed to hedge against inflation. TIPS are sold in 5-, 10- and 30-year terms and come with fixed interest rates.
Their principal value fluctuates over time, which makes them different them from I bonds. Investors can buy TIPS on the Treasury website. They can be bought and sold during trading hours on secondary markets.
Advantages
Can help guard an investor against inflation
Disadvantages
Interest rate normally lower than other bonds
Not as beneficial if high inflation doesn’t occur while they’re held
Alternative investments
Investors may want to enter the realm of alternative investments, which refers to investments that aren’t stocks, bonds or cash. Alternative investments can help diversify the current portfolio because some offer more in terms of returns than other types of investments. The major downside however is high volatility, which also makes them risky.
Real estate (REITs)
Investing in a real estate investment trust (REIT) is a way to invest in real estate while circumventing having to own a property. It’s a combined investment in properties that can bring income. Investors in REITs are paid dividends, and you can buy and sell them on major stock exchanges. There are also REIT mutual funds and ETFs.
Advantages
A prudent way to invest in real estate without having to actually own property
Aids to diversify your portfolio
Disadvantages
Fees may apply
There may be tax implications
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