One of the best ways to secure your financial future is to invest, and one of the best ways to invest is over the long term. While it may be tempting to trade in and out of the market, taking a long-term approach is a well-tested strategy that many investors can benefit from. Bankrate’s identified some of the top long-term investments to consider for your portfolio.
1. Growth stocks
Overview: In the world of stock investing, growth stocks are the Ferraris. They promise high growth and along with it, high investment returns. Growth stocks are often tech companies, but they don’t have to be.
They generally plow all their profits back into the business, so they rarely pay out a dividend, at least not until their growth slows.
Who are they good for?: If you’re going to buy individual growth stocks, you’ll want to analyze the company carefully, and that can take a lot of time.
And because of the volatility in growth stocks, you’ll want to have a high risk tolerance or commit to holding the stocks for at least three to five years.
Risks: Growth stocks can be risky because often investors will pay a lot for the stock relative to the company’s earnings.
So when a bear market or a recession arrives, these stocks can lose a lot of value very quickly. It’s like their sudden popularity disappears in an instant. However, growth stocks have been some of the best performers over time.
Rewards: The world’s biggest companies – the Alphabets and the Amazons – have been high-growth companies, so the reward is potentially limitless if you can find the right company.
2. Stock funds
Overview: A stock fund contains a collection of stocks, often unified by a specific theme or categorization, such as American stocks or large stocks. The fund company charges a fee for this product, but it can be very low.
Who are they good for?: If you’re not quite up for spending the time and effort analyzing individual stocks, then a stock fund – either an ETF or a mutual fund – can be a great option.
A stock fund is an excellent choice for an investor who wants to be more aggressive by using stocks but doesn’t have the time or desire to make investing a full-time hobby.
Risks: A stock fund is less risky than buying individual positions and less work, too.
But it can still move quite a bit in any given year, perhaps losing as much as 30 percent or even gaining 30 percent in some of its more extreme years.
If you buy a fund that’s not broadly diversified – for example, a fund based on one industry – be aware that your fund will be less diversified than one based on a broad index such as the S&P 500. So if you purchased a fund based on the chemicals industry, it may have a lot of exposure to oil prices. If oil prices rise, then it’s likely that many of the stocks in the fund could take a hit.
Rewards: A stock fund is going to be less work to own and follow than individual stocks, but because you own more companies – and not all of them are going to excel in any given year – your returns should be more stable. With a stock fund, you’ll also have plenty of potential upside. Here are some of the best index funds.
If you buy a broadly diversified fund – such as an S&P 500 index fund or a Nasdaq-100 index fund – you’re going to get many high-growth stocks as well as many others. But you’ll have a diversified and safer set of companies than if you own just a few individual stocks.
By buying a stock fund, you’ll get the weighted average return of all the companies in the fund, so the fund will generally be less volatile than if you had held just a few stocks.
3. Bond funds
Overview: A bond fund – either as a mutual fund or bond ETF – contains many bonds from a variety of issuers. Bond funds are typically categorized by the type of bond in the fund – the bond’s duration, its riskiness, the issuer (corporate, municipality or federal government) and other factors.
When a company or government issues a bond, it agrees to pay the bond’s owner a set amount of interest annually. At the end of the bond’s term, the issuer repays the principal amount of the bond, and the bond is redeemed.
Who are they good for?: Bond funds are good for investors who want a diversified portfolio of bonds without having to analyze and buy individual bonds.
They’re also good for individual investors who don’t have enough money to buy a single bond, which usually costs around $1,000, and bond ETFs can often be purchased for less than $100.
Risks: While bonds can fluctuate, a bond fund will remain relatively stable, though it may move in response to movements in the prevailing interest rate.
Bonds are considered safe, relative to stocks, but not all issuers are the same.
Government issuers, especially the federal government, are considered quite safe, while the riskiness of corporate issuers can range from slightly less to much riskier.
Rewards: A bond can be one of the safer investments, and bonds become even safer as part of a fund. Because a fund might own hundreds of bond types, across many different issuers, it diversifies its holdings and lessens the impact on the portfolio of any one bond defaulting.
The return on a bond or bond fund is typically much less than it would be on a stock fund, perhaps 4 to 5 percent annually but less on government bonds. It’s also much less risky.
If you’re looking for a bond fund, there’s a variety of fund choices to meet your needs.
4. Dividend stocks
Overview: Where growth stocks are the sports cars of the stock world, dividend stocks are sedans – they can achieve solid returns but they’re unlikely to speed higher as fast as growth stocks.
A dividend stock is simply one that pays a dividend — a regular cash payout. Many stocks offer a dividend, but they’re more typically found among older, more mature companies that have a lesser need for their cash.
Dividend stocks are popular among older investors because they produce a regular income, and the best stocks grow that dividend over time, so you can earn more than you would with the fixed payout of a bond. Real estate investment trusts (REITs) are one popular form of dividend stock.
Who are they good for?: Dividend stocks are good for long-term buy-and-hold investors, especially those who want less volatility than average and who enjoy or need a cash payout.
Risks: While dividend stocks tend to be less volatile than growth stocks, don’t assume they won’t rise and fall significantly, especially if the stock market enters a rough period.
However, a dividend-paying company is usually more mature and established than a growth company and so it’s generally considered safer.
That said, if a dividend-paying company doesn’t earn enough to pay its dividend, it will cut the payout, and its stock may plummet as a result.
Rewards: The big appeal of a dividend stock is the payout, and some of the top companies pay 3 or 4 percent annually, sometimes more. But importantly they can raise their payouts 8 or 10 percent per year for long periods of time, so you’ll get a pay raise, typically each year. The best – called Dividend Aristocrats – have been paying and raising their dividends annually for more than 25 years straight.
The returns here can be high, but won’t usually be as great as with growth stocks. And if you’d prefer to go with a dividend stock fund so that you can own a diversified set of stocks, you’ll find plenty available.
5. Value stocks
Overview: When the market runs up a lot, valuations on many stocks have been stretched. When that happens, many investors turn to value stocks as a way to be more defensive and still potentially earn attractive returns.
Value stocks are those that are cheaper on certain valuation metrics such as a price-earnings ratio, a measure of how much investors are paying for every dollar of earnings.
Value stocks are contrasted against growth stocks, which tend to grow faster and where valuations are higher.
Who are they good for?: Value stocks might be an attractive option because they tend to do well when interest rates are rising. Their lower valuation tends to make them less volatile and lowers their downside potential, too, making them a better option for risk-averse investors.
Risks: Value stocks often have less downside, so if the market falls, they tend to fall less. And if the market rises, they can still rise, too.
Rewards: Value stocks may be able to actually rise faster than other non-value stocks, if the market favors them again, pushing their valuations up. So the appeal of value stocks is that you can get above-average returns while taking on less risk.
Many value stocks also pay dividends, so you can get some extra return there, too.
6. Target-date funds
Overview: Target-date funds are a great option if you don’t want to manage a portfolio yourself. These funds become more conservative as you age, so that your portfolio is safer as you approach retirement, when you’ll need the money. These funds gradually shift your investments from more aggressive stocks to more conservative bonds as your target date nears.
Where to get them: Target-date funds are a popular choice in many workplace 401(k) plans, though you can buy them outside of those plans, too. You pick your retirement year and the fund does the rest.
Risks: Target-date funds will have many of the same risks as stock funds or bond funds, since it’s really just a combination of the two. If your target date is decades away, your fund will own a higher proportion of stocks, meaning it will be more volatile at first. As your target date nears, the fund will shift toward bonds, so it will fluctuate less but also earn less.
Since a target-date fund gradually moves toward more bonds over time, it will typically start to underperform the stock market by a growing amount. You’re sacrificing return for safety.
Rewards: To avoid the risk of outliving your money, some financial advisors recommend buying a target-date fund that’s five or 10 years after when you actually plan to retire so that you’ll have the extra growth from stocks. Ultimately, what the fund is invested in drives your returns. More stock should equal a higher long-term return, while more bonds should equal a lower long-term return.
7. Real estate
Overview: In many ways, real estate is the prototypical long-term investment. It takes a good bit of money to get started, the commissions are quite high, and the returns often come from holding an asset for a long time and rarely over just a few years.
Investing in real estate can be an attractive strategy, in part because you can borrow the bank’s money for most of the investment and then pay it back over time.
Who are they good for?: For those who want to be their own boss, owning a property gives them that opportunity, and there are numerous tax laws that benefit owners of property especially.
That said, while real estate is often considered a passive investment, you may have to do quite a bit of active management if you’re renting the property.
Risks: Any time you’re borrowing significant amounts of money, you’re putting extra stress on an investment turning out well. But even if you buy real estate with all cash, you’ll have a lot of money tied up in one asset, and that lack of diversification can create problems if something happens to the asset.
And even if you don’t have a tenant for the property, you’ll need to keep paying the mortgage and other maintenance costs out of your own pocket.
Rewards: While the risks can be high, the rewards can be quite high as well. If you’ve selected a good property and manage it well, you can earn many times your investment if you’re willing to hold the asset over time.
And if you pay off the mortgage on a property, you can enjoy greater stability and cash flow, which makes rental property an attractive option for older investors. Here are 10 tips for buying rental property.
8. Small-cap stocks
Overview: Investors’ interest in small-cap stocks – the stocks of relatively small companies – can mainly be attributed to the fact that they have the potential to grow quickly or capitalize on an emerging market over time. In fact, retail giant Amazon began as a small-cap stock, and made investors who held on to the stock very rich indeed.
Small-cap stocks are often also high-growth stocks, but not always.
Who are they good for?: Buying individual stocks requires a lot of work and analysis, but small-caps can be a great place to find the stocks that other investors have missed.
But these small fry companies tend to be much more volatile than larger established firms, so investors need to have an iron stomach.
Risks: Like high-growth stocks, small-cap stocks tend to be riskier. Small companies are just more risky in general, because they have fewer financial resources, less access to capital markets and less power in their markets (less brand recognition, for example).
Like growth stocks, investors will often pay a lot for the earnings of a small-cap stock, especially if it has the potential to grow or become a leading company someday. And this high price tag on a company means that small-cap stocks may fall quickly during a tough spot in the market.
Small-cap companies can be quite volatile, and may fluctuate dramatically from year to year. On top of the price movement, the business is generally less established than a larger company and has fewer financial resources. So small-caps are considered to have more business risk than medium and large companies.
If you’re going to buy individual companies, you must be able to analyze them, and that requires time and effort. So buying small companies is not for everyone. (You may also want to consider some of the best small-cap ETFs.)
Rewards: The reward for finding a successful small-cap stock is immense, and you could easily find 20 percent annual returns or more for decades if you’re able to buy a true hidden gem such as Amazon before anyone can really see how successful it might eventually become.
9. Robo-advisor portfolio
Overview: With a robo-advisor you’ll simply deposit money into the robo account, and it automatically invests it based on your goals, time horizon and risk tolerance. You’ll fill out some questionnaires when you start so the robo-advisor understands what you need from the service, and then it manages the whole process. The robo-advisor will select funds, typically low-cost ETFs, and build you a portfolio.
Your cost for the service? A management fee charged by the robo-advisor, often around 0.25 percent annually, plus the cost of any funds in the account. Investment funds charge by how much you have invested with them, but funds in robo accounts typically cost around 0.06 percent to 0.15 percent, or $6 to $15 annually per $10,000 invested.
At their best a robo-advisor can build you a broadly diversified investment portfolio that can meet your long-term needs.
Who are they good for?: Robo-advisors are another great alternative if you don’t want to do much investing yourself and prefer to leave it all to an experienced professional.
With a robo-advisor you can set the account to be as aggressive or conservative as you want it to be. If you want all stocks all the time, you can go that route. If you want the account to be primarily in cash or a basic savings account, then two of the leading robo-advisors – Wealthfront and Betterment – offer that option as well.
Risks: The risks of a robo-advisor depend a lot on your investments. If you buy a lot of stock funds because you have a high risk tolerance, you can expect more volatility than if you buy bonds or hold cash in a savings account. So, the risk is in what you own.
Rewards: The potential reward on a robo-advisor account also varies based on the investments and can range from very high if you own mostly stock funds to low if you hold safer assets such as cash in a high-yield savings account.
A robo-advisor will often build a diversified portfolio so that you have a more stable series of annual returns but that comes at the cost of a somewhat lower overall return.
10. Roth IRA
Overview: A Roth IRA might be the single best retirement account around. It lets you save with after-tax money, grow your money tax-free for decades and then withdraw it tax-free. Plus, you can pass that money on to your heirs tax-free, making it an attractive alternative to the traditional IRA.
Who are they good for?: A Roth IRA is a great vehicle for anyone earning income to pile up tax-free assets for retirement.
Risks: A Roth IRA is not an investment exactly, but rather a wrapper around your account that gives it special tax and legal advantages. So if you have your account at one of the best brokerages for Roth IRAs, you can invest in almost anything that fits your needs.
If you’re risk-averse and want a guaranteed income without any chance of loss, an IRA CD is a good option. This investment is just a CD inside an IRA.
And inside a tax-friendly IRA, you’ll avoid taxes on the interest you accrue, as long as you stick to the plan’s rules.
You have almost no risk at all of not receiving your payout and your principal when the CD matures. It’s about as safe an investment as exists, though you’ll still have to watch out for inflation.
Rewards: If you want to kick it up a few notches, you can invest in stocks and stock funds and enjoy their potentially much higher returns – and do it all tax-free.
Of course, you’ll have to endure the higher risks that investing in stocks and stock funds presents.