Where to Invest Your Money for Long Term Growth
vemuda.com - Within the first chapter of his book ‘The Intelligent Investor’, Benjamin Graham (also known as the Father of Value Investing), does a great job at explaining the difference between an investor and a speculator. He states: “An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative”.
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Investing, as defined by Graham, is knowing exactly what you are buying. Whatever you have invested in is stable for the long term. Along with this, you know that you will get substantial return either through capital appreciation or through any healthy dividends the investment pays.
Being labeled an ‘investor’ when you really are a ‘speculator’ is something Graham warns us about. He mentions that the term ‘investor’ is being ubiquitously used to describe anyone and everyone who participates in the stock market.
If you purchase a stock based on a hot tip from a friend or your broker, you are not an investor. You are a speculator. This is despite the fact that you might make a good investment return on your purchase.
Similarly, if you were to invest in a mutual fund based on a TV advertisement you saw recently, you are still a speculator. Why? Because you have not done your due diligence to see if the investment you are eyeing is a beneficial one. You are simply speculating. Just because one has invested, it does not automatically make them an investor.
In an interview with the Financial Crisis Inquiry Commission, Warren Buffett outlined what he believed was the “real test” to determine whether a person is an investor or a speculator. He said: “And I say, the real test is whether you care if the markets are open or not. When I buy a stock, I don’t care if they close the stock market tomorrow for a couple of years because I am looking to the business – Coca-cola, or whatever it may be – to produce returns for me in the future from the business. Now, if I care if whether the stock market is soap tomorrow, then to some extent I'm speculating because I'm thinking about whether the price is going to go up tomorrow or not. I don't know whether the price is going to go up”
1. Be Prepared for the Ups and Downs
Long term investing is about wealth creation. The main aim is to provide yourself with passive income to aid your retired life.
With investing, you need to be aware and accept the risks you may face when pursuing investments with higher rewards. All assets have risk. Even real estate, which is known to be an asset with the least risk or failure, saw an erosion in value during the 2007-08 financial crisis.
This may have gotten you thinking: if all assets are prone to fall in value from time to time, how do I actually make my money? Well, the trick behind this is simple in theory. In practice however, many face issues.
You are mainly focusing on long term returns on your investment. Due to this, you needn’t worry about the short-term price fluctuations. These short-term fluctuations can be attributed to phenomenon known as ‘random walk’. You don’t have to pay much attention to them.
To stack the odds in your favor, you need to give your investments a chance to recover. Even if over the next 5 years the investment goes does by 20%, it could then double or even triple over the next 10 years. Herein lies the answer to making your money.
We all know that in theory, not succumbing to your emotions and overcoming the sense of panic is the answer. In practice, however, this can be a bit difficult. However, this is where you stand out. You have to think long term – give yourself the chance to overcome the short-term dips so that you gain the long-term returns. Now, let’s take a look at the investments.
In many ways, the stock market is seen as the primary mode for long term investment. There are several advantages of owning a stock:
- They are “paper” investments which means that you do not have to manage a property or a business
- They represent an ownership in a profit-generating company.
- Stocks can rise in value exponentially in the long run.
- You can make a diversified portfolio to hedge your risks.
- It Includes capital appreciation and dividends.
There are two categories of stock that you might be interested in – growth stocks and high dividend stocks. Companies that fall in the growth stock category reinvest their profits in growth rather than paying out dividends to their stockholders.
The investor will benefit from capital appreciation in the long run. High dividend-paying companies are more mature in nature and investors that prefer less risky and more consistent earnings should go for this option.
The average annual stock return based on the S&P 500 is around 10% per year. In spite of wars, depressions, recessions and several stock market crashes, this value will always stay the same.
3. Long Term Bonds
These are interest-bearing securities with terms greater than 10 years. The primary attraction of bonds is usually the interest rate.
Since they are longer in nature as compared to the short-term instruments like T-bills or repos, they therefore pay a higher yield. The average long-term yield in the past decade or so have ranged somewhere between 6% to 8%.
4. Mutual Funds
The advantage of a mutual fund is that you are hiring professional managers to handle your funds and you do not have to worry about them. A fund manager may choose 20 to 30 companies to invest your funds in a pool. This is along with other people’s investments as well.
Mutual fund managers have varying degrees of success at active management. In fact, most do not outperform the market. Only about 22% of mutual funds outperform for as long as five years.
Art is one of the older investments on this list, and its value becomes apparent as we compare it to those key points from the beginning of the post.
Firstly, knowing what you're buying: Many paintings will come with provenance, and auction houses will vet pieces heavily before offering them. Knowing which specific pieces to buy is a bit trickier, but I’ll reveal a brilliant way to avoid the guesswork, in just a minute.
Parameter #2 is long-term stability, which the art market excels at. In fact, this summer, the NYT declared that the art market was “bulletproof”. Even as superstar stocks like Apple and Amazon tumbled 20% and 35% for the year.
This is because it “has been proven, both by repeated sales and hedonic regression models, that returns in the art market are largely non-correlated with returns in the stock market.”
Art’s stability is increasingly relevant with inflation currently at 9% in the U.S. Because art has long been celebrated as an inflation hedge. In fact, a recent CNBC interview applauded $2.5 billion in art sales this summer pointing out that “History does show that art prices do rise during inflationary periods… rising 130% between 1977-1982,” the last time inflation was this high.
And the last point: returns. Art pieces can increase in value in the hundreds or thousands of percents, and contemporary art has even been outpacing the S&P 500 for the past 26 years, by more than double.
Not only that, but a select group of art investors has seen over 25% net returns for the last 4 years in a row, because they invested in art with Masterworks.
It’s the first platform for buying and selling shares of multimillion-dollar paintings, from legends like Picasso and Banksy. So, you can get art into your portfolio without spending millions.
Remember when I mentioned how tricky it is for most people to pick the right art? Masterworks has a proprietary data set on the art world.
So extensive that they’re asked by firms like Citi to partner on reports on the global art market. They select less than 3% of the thousands of paintings they’re offered, and put them on their platform for investors.
ETFs are similar in what they do compared to mutual funds. They represent a portfolio of stocks, bonds or other investments.
However, unlike mutual funds, ETFs are passively managed and invest in an underlying index. This is why the management cost of ETFs are significantly lower as compared to mutual funds that deploy a whole team of experienced wealth managers to manage the funds.
With this in mind, if you are looking to closely replicate the performance of a benchmark, like for example an index, and you want to keep the management cost at a minimum, EFTS are a good choice for you.
7. Real Estate
Real estate provides income from primary two sources:
- Rental income
- Capital appreciation Up until 2007-08, it was believed that real estate was one such investment that rarely lost its value.
However, the financial crisis proved all of us wrong. But, that being said, real estate will also recover in the long run and investors with a long-term perspective will enjoy profitable returns.
8. Tax Sheltered Retirement plans
Roth IRAs deserve a special mention here. That is because it offers tax-free income in retirement. Yes, you heard it correctly – tax free and not just tax deferred. With an IRA, any withdrawals you make are tax-free provided you have been in the plan for at least five years AND, you begin taking distributions at 59 and a half years of age or above. The compounded effect of these tax savings can exponentially increase the long term returns for an investor.
Many amateur or first-time investors might choose to invest here. The reason is that the robo-advisors handle all the investing for you.
All you need to do is to fund your account periodically and the platform will handle the rest including managing your portfolio, making new investments, re-investing dividends, and rebalancing, as necessary. Many even offer special services, like tax-loss harvesting.
An annuity is an investment contract you make with an insurance company. You put a certain amount of money - either upfront or over a specific period.
In exchange, the insurance company will provide you with a specific sum of income. This term can be for a fixed number of years, or for life.
Final Thoughts on Long Term Investments
It is always better to have a diversified portfolio that includes some portion in stocks, bonds, real estate, mutual funds, or alternative investments. The more diversified your portfolio is, the more you can do away with the unsystematic risk that relates to individual performances of those asset classes.
Well, thank you so much for reading today’s post! With that said, have a great day, and see you all in the next one.