What is considered a long term investment
A long-term investment strategy involves buying and holding assets for several years, typically more than 5 years. This strategy is based on the belief that although markets may fluctuate in the short term, over time they will deliver a positive return.
Long-term investing often involves a focus on assets that can generate growth or income over time, such as stocks, bonds, real estate, and mutual funds. Here's a breakdown of these asset types:
- Stocks: Owning shares of a company. Stocks have the potential for high growth over the long term.
- Bonds: A form of lending money to a company or government for a fixed period of time, in return for regular interest payments. Bonds typically offer lower returns than stocks but with less risk.
- Real Estate: This includes investing in rental properties or real estate investment trusts (REITs). These assets can provide income through rent and potential appreciation over time.
- Mutual Funds: These are funds that pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other assets.
Example: Compound Interest and Long-term Investing
One of the key advantages of long-term investing is the power of compound interest. Let's take an example of investing in a mutual fund that delivers an average annual return of 7%. If you invest $10,000 initially and then add $200 each month, here's how your investment might grow:
- After 1 year: $14,400
- After 5 years: $84,200
- After 10 years: $204,200
- After 20 years: $606,200
- After 30 years: $1,261,700
This calculation assumes that you reinvest all your earnings back into the fund. The longer you stay invested, the more time your earnings have to generate their own earnings, which is the power of compounding.
Example: Diversification in Long-term Investing
Long-term investing also involves diversification, which is a way to spread risk by investing in a variety of assets. For example, if you were investing $10,000 for the long term, you might split it like this:
- $5,000 in a diversified stock mutual fund
- $3,000 in a bond mutual fund
- $2,000 in a REIT fund
By diversifying, you reduce the risk of a poor performance in any one asset dragging down your entire portfolio.
Risk and Volatility
It's also important to understand that all investments come with some level of risk. In the short term, the value of your investments can go up and down, a phenomenon known as volatility. This can be visually represented by a line graph with the vertical axis representing value and the horizontal axis representing time. The line might fluctuate up and down in the short term but shows an upward trend over the long term.
That's why long-term investors need to be patient and not panic when the value of their investments falls in the short term. Over the long term, the trend in the value of investments has historically been upward.
This explanation is a simplification of the complex world of investing, and it's important to do your own research and consider seeking advice from a financial advisor. And remember, all investments carry risk and past performance is not indicative of future results.
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