The 5 Best Long Term Investments to Grow Your Money
Long-term investments are a great way to help you save for retirement and add stability to your future. With so many available options, you need to know which investments are worth the time and resources you will ultimately put into them. Throughout this blog, I will cover the five best long-term investments to help grow your money and set you up for retirement success.
Key Takeaways:
· Reviewing Why Index Funds are Great Investments
· Why You Need to Invest in Yourself
· The Beauty of Depreciation
· Embracing the Entrepreneurial Spirit
· The Rules for Owning Individual Stocks
Reviewing Why Index Funds are Great Investments
The first long-term investment that I want to review is the index fund. If you have listened to my podcast, Retire with Ryan, then you have likely heard me discuss index funds before. An index fund is typically an ETF or Mutual Fund designed to track a certain segment of the stock market. A popular segment tracked by index funds is the S&P 500 which includes the 500 largest public companies in the United States. Although other examples would consist of the bond, real estate, and commodities markets.
One of the benefits of index funds is that they are generally low cost funds. Low annual fees allow more of your money to stay invested and grow over time, which could make a substantial difference in the future. There have been several studies that show that very few investors can beat the performance of a simple index like the S&P 500 so it’s safe to assume that dollar cost averaging into index funds will be suitable for most long-term investors.
If you want to gain greater diversification then I would suggest you look at a total stock market index fund. Total stock market funds include small cap and mid cap stocks so you gain exposure to a larger amount of companies. With this, you could consider adding an international index fund to further diversify your portfolio by getting exposure to international companies as well. This would be an example of using only two funds and yet having a fully diversified portfolio that you can add to over time as you save for retirement.
If you are new to investing, then I would suggest you go back and listen to my podcast, The 5 Step Portfolio Process.
Why Your Need to Invest in Yourself
The second long-term investment that I want to review is investing in yourself or your family through education and training. You may read this and wonder, how will this grow my money? The first way is that it will help you grow your income through a variety of methods to improve your knowledge and/or skills. This will allow you to make more money at your job and provide you with additional disposable income that you can then invest.
One of these methods would be to earn a college degree. This does not have to be at a top university, a State or community college degree can have the same impact depending on the industry. The important part is to finish because there are many jobs that require applicants to have a college education. A bachelor’s degree can open doors to opportunities that would not have been available without it. These jobs will pay a higher rate than positions that do not require a degree in the industry because employers must compensate you for the additional knowledge and experience that you bring to the position.
However, investing in yourself is not limited to a college education. Many individuals do not feel that college is for them. For these individuals, I would suggest that you determine what you would like to do in the future. For example, if you want to work in one of the trades then you should consider going to trade school. These degrees take 1-2 years depending on which occupation you would like to go into compared to the 4 years required for a bachelor’s degree.
Other than going to school, there are courses that you can attend to improve your skills and knowledge base. If you want to be a financial advisor, then you could consider earning a professional designation such as the Certified Financial Planner (CFP). Or if you like coding then consider taking a coding bootcamp to polish your skills and improve your resume. The point I am trying to make is that investing in yourself can have a huge impact on your future savings. If you can polish your knowledge and skills, then you will be entitled to higher income which you can then invest long-term and grow for your future retirement.
The Beauty of Depreciation
The third long-term investment to grow your money is real estate. I would suggest you listen to my podcast episode, 6 Ways to Make Money from Real Estate if you are interested after reading this section. One of the major reasons to invest in real estate is the depreciation. You can take advantage of this when you invest in a property outside of your primary residence such as a residential or commercial rental property.
When you pay for the rental property, you can write off a percentage of the acquisition cost for depreciation. You can offset the gains from a residential rental property with depreciation for 27 years and 39 years for a commercial rental property. Therefore, you can offset a portion of the income from your rental property with the acquisition cost which will reduce your taxable income. Which means that the rental property will not only provide a second income stream, but will also reduce the total amount of taxes you pay.
Keep in mind, there are other costs of owning a rental property such as property taxes, insurance, maintenance costs, and the mortgage. Although, the renter’s monthly payments should at least cover a portion of the mortgage payment so that will not be completely out of pocket. Typically, when a rental property is acquired, the investor will opt for a mortgage between 20-30 years. If the investor were to hold the property until the end of the mortgage, then the expenses to own the property would significantly decrease. At that point, the investor could either continue to rent the property and collect a larger amount of income or sell the property.
The real benefit of owning a rental property is the long-term appreciation of the property. Over the long-term, real estate has only averaged about 3-5% appreciation per year. Meanwhile, the stock market has averaged between 8-11% per year, which is substantially higher. Therefore, the stock market offers a better long-term growth potential, but you lose benefits such as the ability to write off depreciation.
Another benefit of owning real estate is the leverage required to purchase the property. Most banks will require that you put 20-30% down to purchase a rental property and then the rest of the portion is paid off through a mortgage. Meanwhile, you need the full amount to purchase a stock which can require a large sum of money if you are trying to build a large position. For this reason, you’ll be able to gain greater exposure with a smaller amount of money through real estate.
If you are approaching retirement then investing in a rental property may not be suitable. I own some rental properties and things are great when the tenants pay their rent on time. However, owning a rental property can be a pain when there are issues. There are times where you are forced to evict a family or require multiple repairs at once and these situations can be less than pleasant. For this reason, if you are willing to do the work and manage the headaches then I would suggest investing in real estate. Otherwise, save yourself the hassle and focus on one of the other long-term investments I recommend.
Embracing the Entrepreneurial Spirit
The fourth long-term investment that I recommend is to start or purchase a business. There are a lot of people in the market selling their small businesses as the Baby Boomers are approaching retirement. These opportunities can be found through connections, a business broker, or even through online search. In addition, there are local business brokers that you can find through online search to assist you in the purchase or sale of a business. The one thing I would recommend is to look at reviews to ensure that the resources you use are credible. Therefore, there are limitless resources and opportunities to purchase a business if you are interested.
Granted, it’s not easy to own a small business. The buck stops with you, so you need to be prepared to put in the necessary hours and solve whatever issues arise. Although, I believe that the benefits of owning a business significantly outweigh the negatives. First, you get to be your own boss, which can be quite rewarding. You can set your own hours, write-off business expenses, and take a salary through the business.
If you are successful in running the business, then you can sell it for a lump-sum when you are ready to retire. If the business experienced growth since the purchase date, then you would likely be able to sell it for a profit. The other option would be to teach your children or grandchildren about the business so that they could run it when you are ready to retire. This way the business that had provided for you throughout your working years could continue to provide for future generations.
The other option is to start your own small business. This would be more work because you would have to start from scratch and create all the systems within. This includes the business plan, location, client base, supply chain, etc. It could be overwhelming and complex for individuals that do not have experience with opening a business. On top of that, there is the possibility that the business will fail which can be costly. Therefore, I would suggest purchasing a small business unless you are savvy in the field and have a fool-proof plan.
The Rules of Owning Individual Stocks
The last long-term investment that I will cover is the investment in individual stocks. Purchasing individual stocks is better suited for seasoned investors who are willing to do more research and put more time into managing their investment portfolio. I caution novice investors that want to purchase individual stocks because there are a lot of poor investment recommendations spread across the internet, news, and newspaper. This can be dangerous because investors tend to believe the information they read if they do not know how to verify the information themselves. Therefore, I would recommend that novice to intermediate investors stick to index funds. It would provide you with average returns, while reducing the potential for mistakes, and saving you time and stress.
For those of you that still want to purchase individual stocks, I have compiled a set of rules that you should follow. Together these rules are known as the 5-10-20 rule. The 5 means that you should not have an individual stock that accounts for more than 5% of your investment portfolio. The 10 means that you don’t want to have more than 10% of your portfolio invested in one sector. Lastly, the 20 means that you should own at least 20 individual stocks. If you own 20 or more stocks, then the effect of one stock within your portfolio experiencing a major loss or even bankruptcy will be reduced.
The idiosyncratic risk also known as stock-specific risk can be diversified away in an investment portfolio. This can be accomplished by purchasing a variety of stocks across the available sectors to ensure that you do not have too much exposure in any one sector. Diversification is arguably one of the most important elements in an investment portfolio because it limits the downside in your portfolio. However, it can also limit the upside of your portfolio. If you held two stocks in your portfolio and one increased 50%, then that would have a much larger impact on a portfolio comprised of two stocks versus a portfolio of thirty stocks.
To conclude, I suggest that most investors stick to a dollar cost average (DCA) approach when investing. A DCA approach invests a fixed dollar amount on a regular basis. A relevant example would be an investor who puts $750 each paycheck (bi-weekly) into their 401(k) and invests it into an S&P 500 index fund. The stock market has had a long-term upward bias which means that over time the investor should make money on their investments. As I said, it’s extremely difficult to outperform the S&P 500 so you might as well save yourself the stress and invest responsibly.
If you are interested in professional help with your investment portfolio or financial planning then I would suggest you set up a consultation with me here.
Check out my recommended short-term investments by reading my blog, The 7 Best Short-Term Investments to Grow Your Money!
