Best Funds For Long-Term Investment Strategies

There are many options available for long-term investments, each with its own set of risks and potential returns. Stocks, bonds, mutual funds, exchange-traded funds (ETFs), commodities, real estate, and alternative assets are some of the most common types of long-term investments.

Stocks are a popular choice for long-term investments due to their strong historical performance. A share of stock represents ownership in a company, and if the company performs well over time, the stock price tends to rise.

Bonds are a type of fixed-income investment where investors lend money to a company or government entity for a set period and receive a fixed interest rate in return.

Mutual funds and ETFs are investment funds that pool money from multiple investors to purchase a diverse range of stocks, bonds, or other securities. They are managed by professionals and provide easy diversification at a relatively low cost.

Real estate is another traditional long-term investment option, offering the potential for steady income and capital appreciation.

Commodities, such as gold, silver, oil, and agricultural products, can also be a part of a long-term investment strategy, providing diversification and a hedge against inflation.

Alternative assets, including private equity, fractional ownership of real property, precious metals, and cryptocurrencies, are becoming increasingly popular as they offer reduced correlation to traditional asset classes and enhanced diversification.

When considering long-term investments, it is essential to evaluate your financial goals, risk tolerance, and time horizon. Diversification, cost-efficiency, and a long-term perspective are key factors in successful long-term investing.

Exchange-traded funds (ETFs)

ETFs are offered on virtually every conceivable asset class, from traditional investments to alternative assets like commodities or currencies. They are also available on most online investing platforms, retirement account provider sites, and investing apps, often with commission-free trading.

• Passive ETF: Passive ETFs aim to replicate the performance of a broader index, such as a diversified index like the S&P 500 or a more specific targeted sector or trend.
• Actively Managed ETF: Actively managed ETFs do not target an index of securities but rather have portfolio managers making decisions about which securities to include in the portfolio. They have benefits over passive ETFs but can be more expensive for investors.
• Bond ETF: Bond ETFs are used to provide regular income to investors, and distribution depends on the performance of underlying bonds, which may include government, corporate, and state and local (municipal) bonds.
• Stock ETF: A stock ETF is a basket of stocks that track a single industry or sector, like automotive or foreign stocks. The aim is to provide diversified exposure to a single industry, including high performers and new entrants with growth potential.
• Industry or Sector ETF: These ETFs focus on a specific sector or industry, like an energy sector ETF that includes companies operating in that sector.
• Commodity ETF: Commodity ETFs invest in commodities like crude oil or gold, and they can diversify a portfolio, making it easier to hedge market downturns.
• Currency ETF: Currency ETFs track the performance of currency pairs consisting of domestic and foreign currencies. They can be used to speculate on currency prices based on political and economic developments and to diversify a portfolio or hedge against volatility in forex markets.
• Bitcoin ETF: The spot Bitcoin ETF was approved by the SEC in 2024, allowing investors to be exposed to bitcoin's price moves in their regular brokerage accounts.
• Ethereum ETF: Spot ether ETFs provide a way to invest in ether, the currency native to the Ethereum blockchain, without directly owning the cryptocurrency.
• Inverse ETF: Inverse ETFs earn gains from stock declines by shorting stocks.
• Leveraged ETF: A leveraged ETF seeks to return multiples on the return of the underlying investments.

When considering investing in ETFs, it is important to remember that they have some drawbacks, including trading costs, illiquidity, and tracking errors. It is also crucial to read the summary and full prospectuses of an ETF before investing, as these provide detailed information on the ETF's investment objective, principal investment strategies, risks, costs, and historical performance.

Stocks

The average annual return on large-cap stocks since 1926 is approximately 10%. Johnson predicts that if these historical average returns continue, an investor in large-cap stocks could double their money in slightly over seven years and increase their investment tenfold in approximately 23 years.

There are several categories of stocks that long-term investors should consider:

Growth Stocks

Growth stocks are companies expected to grow their revenues and earnings at higher rates than industry peers over time. They can be higher-risk investments than typical stocks but also come with more potential upside. Examples of large-cap growth stocks that have performed extremely well in the past decade include Amazon (AMZN), Nvidia (NVDA), and Tesla (TSLA).

Value Stocks

Value stocks are companies whose shares are priced at a discount to their underlying value based on fundamental metrics such as earnings, sales, and book value per share. They can be considered stocks that are temporarily on sale. Value stocks are generally considered safer and more stable investments than growth stocks but may not have as much long-term upside potential. Examples of popular value stocks include Exxon Mobil (XOM), Johnson & Johnson (JNJ), and Verizon Communications (VZ).

Dividend Stocks

Dividend stocks are companies that regularly distribute a portion of their earnings directly to investors in the form of cash or additional shares of stock. Dividend yield is calculated by dividing its annual per-share dividend payment by its share price. Examples of popular dividend stocks with dividend yields greater than 5% include AT&T (T), Walgreens Boots Alliance (WBA), and 3M (MMM).

When investing in stocks, it is important to have a long-term perspective and not be discouraged by short-term dips in the market. Additionally, diversification is key to mitigating risk and optimising returns. Investors should consider a mix of growth and value stocks, as well as dividend-paying stocks, to build a well-rounded portfolio.

Bonds

Types of bonds

There are three main types of bonds:

• Corporate bonds are issued by companies. Investment-grade corporate bonds are considered safer and offer lower interest rates, while high-yield bonds, or junk bonds, have higher yields but a higher default risk.
• US Treasury Securities are bonds issued by the US federal government and are considered the safest type of bond investment.
• Municipal bonds are issued by states, cities, and other local governments. They offer unique benefits but investors can face liquidity risks if they plan to sell before maturation.

Bond funds

Bond funds are a good option for investors who want the diversification of bonds without the high cost of buying individual bonds, which usually cost around $1,000 each. Bond ETFs can often be purchased for less than $100.

Vanguard estimates that US bonds have generated an average annual return of about 5.5%. While this is lower than the average return on stocks, bonds are a safer investment and can balance out a stock-heavy portfolio.

When to choose bonds

Historically, long-term bonds have provided higher interest rates than short-term bonds. However, this is not the case as of 2024. An inverted yield curve means that short-term bonds are currently offering higher returns with less interest rate risk.

Where to buy bonds

You can invest in bond funds through any online broker that offers ETF and mutual funds.

Real estate

That being said, real estate can be an attractive strategy because investors can borrow money from a bank to fund most of the investment and then pay it back over time. For those who want to be their own boss, owning a property gives them that opportunity, and there are numerous tax laws that benefit property owners.

There are several ways to invest in real estate, including purchasing property directly or investing in real estate investment trusts (REITs). REITs are companies that own or finance real estate assets, allowing individual investors to own equity stakes in large-scale real estate companies. By law, REITs must pay out 90% of their taxable income in the form of dividends to shareholders, making them a favourite among income investors.

When deciding whether to invest in real estate, it is important to consider the risks and rewards. While real estate can provide high returns, it is also a highly illiquid asset that may be difficult to sell quickly. Additionally, there are significant upfront costs and ongoing maintenance expenses associated with owning property.

One way to invest in real estate is through exchange-traded funds (ETFs) or mutual funds that focus on the real estate market. These funds allow investors to diversify their portfolio and benefit from the expertise of professional fund managers. Some examples of real estate ETFs include:

• IShares Core U.S. REIT ETF (USRT)
• Vanguard Real Estate ETF (VNQ)
• Nuveen Short-Term REIT ETF (NURE)
• IShares Residential and Multisector Real Estate ETF (REZ)

Another option is to invest in individual REITs, which can be purchased through an investment account or brokerage account. Some top-performing publicly listed REITs include:

• Strawberry Fields REIT
• ACRES Commercial Realty Corp.
• SL Green Realty Corp.
• National Health Investors, Inc.

Overall, real estate can be a viable option for long-term investors, but it is important to carefully consider the risks and rewards before making any investment decisions.

Alternative assets

Alternative investments are a broad category of financial assets that do not fall into conventional investment categories such as stocks, bonds, and cash. They are often less liquid and more complex than traditional investments, with higher fees and minimum investment requirements. Here are some common types of alternative assets:

• Real Estate: This includes investing in physical properties, property-based securities, real estate investment trusts (REITs), and real estate crowdfunding platforms. Real estate can provide stable cash flow and capital appreciation over time.
• Commodities: Commodities are tangible goods such as gold, silver, oil, and agricultural products. They are considered a hedge against inflation due to their real-world uses and stable demand.
• Art and Collectibles: These include items such as artwork, sports memorabilia, entertainment memorabilia, high-end watches, and other collectibles. Their value may increase over time as they become more historic or sought-after.
• Cryptocurrency: Cryptocurrencies like Bitcoin and Ethereum are considered alternative investments due to their unique characteristics outside the scope of traditional stocks and bonds. They offer potential capital appreciation and passive income.
• Private Equity and Venture Capital: Private equity involves investing in private companies, often providing additional benefits such as industry expertise and mentorship. Venture capital focuses on startup and early-stage companies.
• Hedge Funds: Hedge funds employ various investing strategies to achieve high returns and are typically only available to institutional investors or high-net-worth individuals.
• Peer-to-Peer Lending: P2P lending involves offering loans to individuals or businesses through online platforms, providing investors with fixed monthly repayments and potentially higher returns than standard savings accounts.

Frequently asked questions