Long-term financial goals are often best addressed with a long term investment portfolio.
Long term investments are commonly used to reach goals such as retirement and building wealth over time. But even if you know all of this, do you know how to get started? We cover the steps to get you there.
A long term investment portfolio is one geared towards long term returns.
They are held by the individual or group of investors for an extended period, normally at least 5 years. The idea is to build wealth over time through appreciation and dividend payments.
Long term investment portfolios can have multiple types of assets. The specific types of assets and the assets themselves are chosen based on the investor’s risk portfolio and strategy.
Investors with a long term outlook can benefit from compound interest. Their investments can grow over time while riding out market fluctuations. They benefit from the general upward trend of the stock market.
The most common long term investment assets are stocks, bonds, commodities, real estate, and alternatives.
Stock investments, including through ETFs and mutual funds, normally play the largest part.
With a diverse pool of stock picks, or a diverse investment pool (ETF or MF), decent rates of compound interest with highly mitigated risk are possible.
Bonds are low-risk but also low-reward. But they serve as a hedge against inflation.
Commodities are actual economic goods with high fungibility.
“Alternatives” describes all investments that don’t fit into the above groups. Examples include precious metals and cryptocurrencies.
A long-term investment is one taken for sustained gains over time.
You are not looking to sell in the short term and are thus not concerned when short term price drops arise.
Funds are probably the best long term investment example. These include stock funds, bond funds, and other funds.
Another example would be funds that do not contain a single asset type. Many funds invest in a mix of stocks, bonds, and other assets.
A long term investment portfolio can be created in a step-by-step process.
That process can be outsourced to a professional financial planner if you don’t want to handle it yourself. In any case, there are several considerations.
Know what you want to achieve before you start investing.
Even financial planners will make many adjustments according to the goal of your portfolio.
The most common goals are:
These are long-term goals, but the timeframes vary widely. This is the timeframe that your portfolio will be built around.
The distinction here is important. If you’re young and want to start investing in your retirement, you have time for a riskier portfolio that can net you higher returns. So, consider the timeframe required for your goals.
Investment fees can bite into your returns. It pays to keep them low.
If your portfolio isn’t diverse, it is a risky portfolio. If one thing goes wrong, it can severely impact you.
This is true of the number of assets you hold as well as the type. For example, if you are overinvested in oil and natural gas companies, one industry-wide downturn will hit you very hard.
It is best to invest in a mix of asset classes as well. Within each asset class, spread out your risk by investing in different assets. This is a safety against market volatility that reduces your risk.
Some of your investments will grow faster than others over the long term.
This creates an unbalanced portfolio. The way to address this is to occasionally rebalance.
At some point, you will need to sell certain assets and reinvest the proceeds. The goal is to get back to the target allocation. Calculate which asset classes are overrepresented and return to your target allocation.
The most important step is to make sure you do not make rash decisions.
That means staying patient and fighting any urges to make sudden changes that aren’t thoroughly well thought out. This can be the hardest challenge for some long term investors.
The other urge to fight is the one to make short term gains.
If one asset performs very well over a short period, that doesn’t justify selling it. You incur fees and move your strategy in the opposite direction by doing so. It may feel ok in the moment, but over the long term, this kind of behavior jeopardizes your long term goals.
Instead, remember that you’re in the middle of a buy and hold strategy meant to meet your long term financial goals.
Discipline will help ensure that you don’t trade your future wealth for some cash today.
A long term investment portfolio is one that is meant to make big goals possible.
It requires a level of discipline and well thought out decisions. Follow the steps that ensure you are set on the path to reaching the goals you set.
If you do not know where to start, consulting a financial planner is highly advisable.
February 21, 2024
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