Best Long-Term Investments

There are many types of long-term investment to choose from, some of which include:

Property

Investing in housing, commercial property or land is a popular choice for long-term investors, especially Australians. It is estimated the residential property market in Australia is an astonishing $10 trillion dollars. Property can result in capital growth, as well as regular income, if you decide to rent out the space.

Timing when you buy and sell a property is key, as its value can rise and fall. You’ll want to buy a property that has the potential to increase considerably in value over the set number of years you have in mind. If it does, you could see huge returns from raising the rent on the property, or selling it.

If the property falls in value, this could limit potential profits. If you’re taking out a mortgage, rather than a cash buyer, you’ll also have to consider the interest fees on the loan, as this can eat into any profits you make.

According to the government’s Moneysmart website, the average return from property investing over the last 10 years has been 6.3% per year. Moneysmart considers property to be a medium to high-risk investment, for a term of at least five years.

Stocks & Shares

Buying and selling stocks and shares, otherwise known as equities, is a way of investing in a company. It allows you to become an owner of a small piece of a large company and receive a portion of their profits. You may also earn the right to vote on share in the profits and who is employed to direct the business.

Investing in stocks and shares ideally offers capital growth and provides income in the form of dividends. As share prices fluctuate daily, they can be considered a volatile short-term investment. However, investing in shares in the long-term allows more time for a company’s profits to grow and its shares to increase in value.

This type of investment is high-risk but comes with the potential for huge returns. It is considered more high-risk than buying bonds because, for example, if a company goes bust stockholders have no guarantee of getting their money back, unlike bondholders. Moneysmart suggests a term of at least five years on this type of investment. It says the average return from Australian shares over the last 10 years has been 6.5% per year.

Bonds

If you buy bonds from a company or the government, you are loaning it money which it will pay you back with interest. This type of investment, especially in the case of government bonds, is generally viewed as safe as bondholders are often prioritised for repayment over shareholders. However, lower-risk investments typically bring lower returns compared to the high-risk variety, and this is the case for bonds.

Corporate and government bonds usually offer fixed-rate interest fees on your cash. However, the price of a bond can rise if the business is performing well. If there’s a high risk of it defaulting on its loans, your returns could suffer.

Choosing different investment types or assets, or even investing in businesses of different sizes in various industries, is crucial to help lower your overall risk.

“It has been said that diversification is the only free lunch with investing,” says Shani Jayamanne, investment specialist at financial services firm Morningstar.

“Instead of thinking about long-term investments, you should put together a long-term portfolio with the right assets for the financial goals that you are trying to achieve.”

You may want to consider investing in funds rather than individual stocks and bonds. Exchange-traded funds (ETFs) and mutual funds, or managed funds as they’re known in Australia, offer exposure to hundreds or thousands of stocks and bonds, which allow investors to build a diversified portfolio.

There is a long list of other types of long-term investments, which may have the potential to provide a steady income, but usually aim to offer capital growth. They include:

• Commodities: These are goods such as gold, silver, oil, copper and even coffee.
• Infrastructure: This asset class ranges from electric vehicle charging networks, to 5G telecom networks and hydrogen distribution.
• Private equity fund: This type of fund invests in private companies which are not listed on a public stock exchange. Private equity funds may also acquire public companies, make them private and increase their potential for growth.
• Collectibles: These are items we collect because there are few in existence or they have intrinsic value, though they are not always considered an official asset class. This includes pieces of art, wine and vintage comic books.

These alternative forms of investment vary in risk and returns depending on the type you choose. As any investing involves risk, it’s important to read the product disclosure statement that comes with an investment product. This will provide information on how it works, including the type of return you should expect, whether that be capital gain or income. It will also tell you how long you will likely have to invest to see a return, any potential risks, legal and tax implications and fees and charges for buying, holding and selling the investment.

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Compound interest is a way of growing an investment over time. It’s when interest on a balance in an investment account is reinvested, and in turn earns more interest on the interest accrued—it’s a virtuous cycle that economists often gush about.

“There have been countless studies done… that timing the market does not work. The key to successful outcomes is time in the market – the duration of time spent with your money invested,” says Jayamanne.

The following graph illustrates how time combined with compounding can grow investments, through the monthly savings required to accumulate $1 million by age 65. The green areas show capital, and the orange growth.

“The earlier you start, the more of the hard work is taken off your plate,” says Jayamanne.

Source: Morningstar

Holding a portfolio for the long-term can require patience. It can help to review your portfolio regularly to check your investments are still aligned with your goals.

It’s also important to not make decisions based on emotion.
“Behavioural risks reflect our tendency as humans to act emotionally during volatility. We are driven by fear and greed, which is a formula for buying at the top of the market and selling at the bottom,” says Jayamanne.

Regularly switching between investments and assets as an emotional response to the market can reduce returns for investors.

While the markets are bound to bounce, Jaymanne suggests focusing on the long-term goal: “So we should always start with us. We should always start with what we are trying to achieve, and base our investments on that by understanding how much risk we need to take on, and understanding which assets will achieve that and in what portions. It is only then that we look to investments.”

You should also ensure you understand the fees involved. These include transaction costs, which can eat into your investment returns. Equities and ETFs, for example, can also incur brokerage each time you buy or sell. This is worth considering if you plan to invest frequently or if you intend to draw down on your investment.

You’ll also need to consider management fees. The graph below shows the impact of a 0.5% difference in fees on a $100,000 investment, when making $1,000 additional investments every month over 20 years with 6% per annum return. As you can see, it’s over $47,000.

Source: Morningstar