A long-term investment in strict terms is one that is held for a longer period of between 12 and 18 months. But in reality, when we talk about long-term investments, the horizon is usually much longer.
A clear example of long-term investment is setting a goal with a view to planning our retirement. Strategies must be based on taking advantage of all that time, making it our pool.
The characteristics of long-term investments
The objectives of this strategy is to achieve the best possible profitability, while building a solid, constant investment without major fluctuations. We seek benefits by taking advantage of the cash flows offered by the portfolio assets (whether dividends or interest).
In investments with a shorter term, it may be interesting to look for assets with high volatility, since a large part of the benefits must come from the revaluation of the assets selected in the market. But, in this case, we must take advantage of time, cash flows, reinvestment of profits and ultimately revaluation.
The first point in making a long-term investment is to recognize the value of diversification. We’ll explain it better.
An asset has a certain risk, and therefore offers a certain return. The investor has only two options: to accept the return and the associated risk; or not to accept it and, therefore, not to allocate higher return on your investment.
In the case of investments with a long time horizon, the risk must be minimized. This is because an investor cannot be exposed to a high level of risk for such a long period. The chances that the risk will eventually arise are greatly increased.
The best way to reduce the specific risk of any investment is by diversifying it with others. Building a global portfolio.
The long – term investments must be raised under a conservative or moderate profile. They must be stable investments, so that they can last over time without suffering serious damage.
The assets suitable for long-term investment should be stable and solvent, so that the constant payment of returns is not put at risk. Stable assets are not very volatile (a clear example of this is fixed deposit).
Profitable long-term investments
Up to this point, risk has been discussed and the need to minimize it when it comes to long-term investments.
But what about profitability?
If the return is associated with the risk assumed and we must focus on assets with little risk, we will generally obtain a poor return.
In any case, if we invest in an asset that offers an adequate return, we must adjust the risk, we can combine it in a portfolio with other safer assets. In this way we can build a portfolio with adequate profitability, keeping the risk at optimal levels for long-term investment.
Therefore, what we must apply are strategies with diversified portfolios, not individual assets. The strategies described are primarily based on equity assets, why?
Simply because its profitability is higher. Studies carried out showed that in the long term, equity assets perform better than any other type of financial instrument.
By combining these assets with a portion of fixed income in our global portfolio for greater stability and consistency, we have the perfect formula for long-term investing ; and we can constitute it from now on. At the end of this text we will see some way to complete our global portfolio.
What are the long-term strategies and portfolios to replicate? Let’s look at some examples.
Investment in Dividends
This strategy for long-term investments is very simple, but at the same time very effective. It is about following the main hypothesis of capitalism and thinking that companies were created to make profits.
These profits are distributed among shareholders in the form of dividends. Therefore, we must select companies that distribute good, constant and increasing dividends.
It is the original strategy of investing in stocks. In fact, the returns of the shares are called variable income because the dividends to be received are not established in any contract, they depend on the profits obtained by the company’s business. The ideal would be to get companies that increase their profits – and therefore their dividends – increasingly.
Market fluctuations don’t matter… Well, actually they do matter, if a stock depreciates on the Stock Market it will be cheaper and therefore the dividend yield will be higher. The investor can take advantage of these depreciations to obtain a higher profitability.
On the other hand, the engine that moves prices in the short and long term is actually the increase in corporate profits. In other words, the growth of the company.
To learn more about this strategy, you can seek the following article on investment strategies to earn extra money.
Alternative investment funds
If you cannot find a fund that exactly replicates the performance of the dividends, then you can invest through other equity funds that invest in large-cap companies in the same market.
This investment fund also reinvests the returns in the fund itself, taking advantage of the compound interest and therefore being a good financial product for long-term investment.
Strategies for Long-Term Investment
It is important to reinvest income in long-term strategies to take advantage of the potential of compound interest.
Investment Value
This strategy has been very popularized by the famous investor Warren Buffett, one of the great fortunes of our planet.
Buffett, in turn, learned it from Benjamin Graham, another great investment master. The Value strategy is typical of the Ben Graham school, of which Buffett has made an entire institution in the financial world.
It’s funny that Warren Buffett is the only person on the Fortune list who has created his wealth by investing in the financial markets. This strategy has been the key to its great success.
To carry out the strategy, we only have to choose a variable income fund whose investment policy follows the guidelines of Warren Buffett and Value investment. Which is based on the search for assets with a market price that is below its objective valuation.
That is, an appraisal of the company is carried out, according to its fundamental data. With this appraisal we will know the objective value of the share.
The market, in the long term, will adjust the price of the quotation to the real value of the share. But this strategy requires patience. Assets are not adjusted in a short period of time. Therefore, it is a great strategy for making long-term investments.
Some words of Warren Buffett:
“Buy only what you’d be happy to keep, even if the market closed for 10 years”
If the investment is made through funds, a professional team will select the securities that will make up the portfolio according to the Value.
Therefore, to create a good portfolio that meets the diversification parameters described at the beginning of this text, we turn to investment funds.
Investment funds that follow the Value strategy
Questions such as, Are the company’s profits consistent? Does it have too much debt? Are the company’s profit margins high and growing? Does it sell differentiated products from the competition? must be answered. There is no doubt that a professional manager is necessary for the selection of assets.
There are other good investment funds that follow the Value strategy, such as global equity funds.
Conclusion
Any long-term fund can be useful to complement those equity strategies. A fund that performs well in the long term, provides a good return in at least 5 years.
Finally, for those who want to have more security in their profitability, since it is a long-term investment and therefore liquidity is less important, a good option would be to complete their portfolio with a diversified and futuristic fund. Thus, the overview for making our long-term investments is complete.
