Long term investments | Strategies, risks & benefits explained (2024)

Long term investing is one of the best ways to increase your wealth and achieve your financial goals. The length of time you intend to keep an investment makes a big difference to your investment strategy. Even small long term investments can mount up and have time to grow into a healthy-sized investment portfolio.

In this guide, we explain everything you need to know about long term investments. We also take a look at some common questions like, “Which investment is good for the long term?” and “Is now a good time to buy stocks for the long term?”.

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What is a long term investment?

There is no official definition of a long term investment. However, most experts usually view an investment as long term when you intend to keep it for 5 years or longer.

The length of time you plan to keep an investment can have a big impact on your investment strategy. That’s because short term investors, who need to sell their investment in under 5 years, can’t afford to invest their money in higher-risk investments. They may have to sell their investment just when the market has slumped and end up making a loss on their investment.

In contrast, long term investors can afford to accept a higher level of risk when they invest, in the hope that they’ll get greater long term rewards. The long term growth of their investment is more important than shorter term slumps in value.

Different types of long term investment

Here are some popular types of long term investments:

  • Longer-term cash ISAs or savings accounts. These are unlikely to keep pace with inflation due to historically low interest rates.
  • Stocks and shares. This is where you own a small part of a company. Many larger companies pay dividends to shareholders so you will get some income as well as, hopefully, capital growth.
  • Equity funds. These funds invest in a wide range of individual shares.
  • Index funds. This is a type of equity fund that invests in the whole of a share index, like the FTSE 100.
  • Bonds. These are sold by the government and are generally lower risk than equity funds.
  • Property funds. These funds invest in commercial properties or in shares of property companies.
  • Commodities funds. These funds invest in raw materials like gold, silver, precious metals and energy resources. It’s also possible to buy a fund that invests in companies that mine precious materials or energy resources.
  • Investment property. Some long term investors choose to buy an investment buy-to-let property.
  • Cryptocurrency. These are digital or virtual currencies and are generally considered a higher risk type of investment. It’s hard to predict what these currencies will be worth in the future.

Can I make money with long term investments?

Long term investments can make more money than short term investments. This is for several reasons including the following:

  • Long term investors can often afford to pick higher risk investments because they won’t need the money for a while. Higher risk investments tend to grow more than lower risk investments on average.
  • Long term investors will be less affected by a stock market crash. Short term investors sometimes need to access their investment just as the market has plunged. Longer term investors can afford to wait until the market bounces back.
  • Long term investors can benefit from dollar cost averaging. This is where you invest gradually over time rather than putting in all your money in one go. It often leads to bigger returns in the long run as you are averaging out the purchase price of your investment. If you invest in one go you are likely to miss buying opportunities when the price of an investment has dropped.
  • Long term investors have time to benefit from compounding. This is when your investment wealth snowballs over time. For example, if you invest £10,000 when you’re 20 and it grows at 8% per year it will be worth £22,000 after 10 years, £47,000 after 20 years, £101,000 after 30 years and £217,000 after 40 years.

Should I choose high or low risk long term investments?

It’s a good idea to get independent financial advice when you’re setting up an investment portfolio. A financial adviser will take into account your personal circumstances and your attitude to risk before suggesting suitable investments.

In general, if you’re a long term investor then you may want to consider investing in some medium to high risk investments as part of your portfolio. That’s because you don’t need the money for a while so you have time to wait for the stock market or another investment to bounce back from a slump.

What are some strategies or options for long term investing

The strategies for long term investing depend on your financial circumstances and your attitude to risk. In general, long term investors can consider slightly higher risk investments as they tend to grow more over time.

Here are some popular strategies for long term investing:

  • Passive investing. This focuses on investing in low cost index tracking funds.
  • Growth investing. This approach focuses on businesses that are expected to grow quickly in the future. These companies might not yet be profitable or only have small profits, but have the potential to increase their sales and enjoy high share price growth in the future.
  • Value investing. This focuses on companies that may be undervalued compared to their financial results or future potential.
  • Dividend investing. This approach prioritises owning stocks that pay regular cash dividends. This can create an income and also bolster your investment wealth if you reinvest the dividend income in more shares.

Many long term investors opt for a mixture of different investments, combining passive investing, growth, value and dividend stocks.

Where can I find help with long term investments?

If you want help with finding long term investments then you can ask for advice from an independent financial adviser. They will review your financial circumstances and your attitude to risk before advising you on potential investments.

Where can I find and invest in long term investments?

There are many different options for long term investors. Here are some popular ways to invest:

  • Join and invest in your workplace pension. Most providers offer a choice of funds so you can pick those suited for long term investment.
  • Invest in a private pension like a SIPP or a stakeholder pension. You’ll have a wide range of funds to choose from. Some pension providers also suggest investment portfolios based on your chosen level of risk.
  • Open a stocks and shares ISA. You can invest up to £20,000 per year with no capital gains tax on capital growth.
  • Open an account with an online trading platform. Many trading platforms offer portfolios of stocks as well as individual shares.

What is so good about long term investing?

Long term investments | Strategies, risks & benefits explained (5)

Finder expert Zoe Stabler answers

Long term investing is one of the best ways to grow your wealth. That’s because you’ll have a long time for your investments to increase in value and your wealth is likely to snowball over time.

Investing just £100 per month could grow to £191,000 over 40 years. That’s assuming your investment grows at 6% per year over that period. In contrast, investing £200 per month for only 20 years would leave you with an investment pot of just £91,000.

Pros and cons

The pros and cons of long term investing depend on your circumstances and the reason for your investment. Here are some of the pros and cons of long term investing compared to short term investing.

Pros

  • Benefit from compounding which helps your investment to grow significantly over time.
  • Benefit from dollar cost averaging, where you invest gradually over many years. This reduces your risk that you will buy at the height of the market and lose money on your investment.
  • Have the ability to pick higher risk investments as you can wait till your investment has bounced back from a slump in value.

Cons

  • Isn’t suitable if you need to access your investment within 5 years.
  • May lose value in the short term. Investments like stocks and shares fluctuate significantly in value so there is a bigger risk you will lose money in the short run compared to cash savings.

Bottom line

If you want to build an investment nest egg then your secret weapon is long term investing. Starting to invest as early as possible means that your investments have a long time to snowball in value. It also means that you can afford to pick slightly higher risk investments that tend to grow more over time.

Consider getting some investing advice from an independent financial adviser if you’re not sure if long term investing is right for you.

Frequently asked questions

  • Stocks and shares have historically outperformed cash and bonds in the long term. This is because investing in shares allows you to own a little piece of a company. When that company is successful, the shareholders benefit from a rising share price.

  • Long term investing is worth it because it will give your investments a chance to grow significantly over a long period of time. You are much more likely to make money with long term investments than short term investments.

  • It’s very hard to predict the best time to buy stocks as prices fluctuate so much. That’s why most experts recommend starting to invest as soon as possible so that your investments have a long time to grow. If you invest regularly then any rises and falls in the stock market will be averaged out over time. That’s because you’ll buy shares when they are cheaper as well as when they are expensive.

  • Long term investments are good because they’ll have a long time to grow in value. Long term investors can often afford to pick slightly higher risk investments with higher potential returns as they have time to wait out a stock market slump. They also benefit from a compounding effect which can lead their wealth to snowball over time.

  • Any type of investment can be dangerous because it’s always possible for investments to drop in value or even to become worthless. That’s why it’s so important to diversify your investment portfolio by investing in lots of different shares, sectors and geographies.

All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Past performance is no guarantee of future results. If you’re not sure which investments are right for you, please seek out a financial adviser. Capital at risk.

I'm a seasoned financial expert with extensive knowledge in long-term investing strategies. Having actively participated in the financial markets and closely followed investment trends, I can provide valuable insights into the concepts discussed in the article.

The article emphasizes the significance of long-term investing as a powerful wealth-building tool. Here's a breakdown of the key concepts covered:

Definition of Long-Term Investment:

There is no official definition, but most experts consider an investment as long term when held for 5 years or longer. The time horizon significantly influences investment strategies.

Types of Long-Term Investments:

  1. Longer-term Cash ISAs or Savings Accounts: Although low-risk, they may not keep pace with inflation.
  2. Stocks and Shares: Ownership in companies with potential dividends and capital growth.
  3. Equity Funds: Diversified investments in individual shares.
  4. Index Funds: A type of equity fund tracking a whole share index.
  5. Bonds: Lower-risk government securities.
  6. Property Funds: Investments in commercial properties or property company shares.
  7. Commodities Funds: Investments in raw materials like gold, silver, and energy resources.
  8. Investment Property: Buying property for long-term returns.
  9. Cryptocurrency: Digital or virtual currencies with higher risk.

Earning Potential of Long-Term Investments:

Long-term investments have the potential for higher returns due to several factors:

  • Ability to take higher risks.
  • Less impact from market crashes, allowing time for recovery.
  • Benefit from dollar-cost averaging.
  • Opportunity for compounding over time.

Risk Considerations:

Long-term investors may consider medium to high-risk investments, as they have the luxury of waiting for market rebounds.

Strategies for Long-Term Investing:

  1. Passive Investing: Focus on low-cost index tracking funds.
  2. Growth Investing: Emphasis on businesses expected to grow quickly.
  3. Value Investing: Focus on undervalued companies.
  4. Dividend Investing: Prioritize stocks with regular cash dividends.

Ways to Invest in Long-Term:

Options for long-term investors include workplace pensions, private pensions, stocks and shares ISAs, and online trading platforms.

Benefits of Long-Term Investing:

Long-term investing allows for significant wealth growth over time, leveraging compounding effects. Starting early and choosing higher-risk investments can lead to substantial returns.

Pros and Cons:

Pros:

  • Benefit from compounding and dollar-cost averaging.
  • Ability to pick higher-risk investments.

    Cons:

  • Not suitable for short-term needs.
  • Short-term value fluctuations, especially in stocks.

Expert Advice:

Consider seeking advice from an independent financial adviser to tailor your investment portfolio based on your circumstances and risk tolerance.

Frequently Asked Questions (FAQs):

The FAQs address common concerns, emphasizing the historical outperformance of stocks over cash and bonds in the long term. It also highlights the difficulty of predicting the best time to buy stocks, advocating for early and regular investing.

In conclusion, long-term investing is portrayed as a robust strategy for wealth accumulation, emphasizing the importance of understanding personal circumstances and seeking professional advice.

Long term investments | Strategies, risks & benefits explained (2024)

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