How to Select Long-Term Investments

Business professionals and individual investors are constantly searching for a successful approach to long-term investing. The stakes are especially high for families because a future college education or retirement often depends on a positive outcome. Selecting long-term investments can involve a combination of uncertainty and stress, and it is not unusual for individuals to wonder if they are making a prudent choice.

The Most Popular Investments

While popularity is a poor method for selecting how to invest, most individuals are naturally curious about how everyone else is choosing investments. According to a recent Gallup Poll, here are the top four favorites of American investors (percentages refer to how many selected an investment category as the “best long-term investment”):

• Real estate: 25%
• Gold: 24%
• Common stocks: 22%
• Savings accounts and certificates of deposit: 16%

In most opinion polls, popularities of specific categories go up and down along with annual performance fluctuations. For example: when real estate and equities were declining in value on a short-term basis several years ago, the percentage of investors favoring those categories declined by about 5 percent. In a similar fashion, gold fell in popularity by 10 percentage points between 2011 and 2013 due to declines in the price of gold.

Financial choices that are popular on a short-term basis are not necessarily prudent alternatives when investors are deciding how to select long-term investments. A strategy known as “contrarian investing” advocates that investors avoid conventional financial trends when buying a long-term investment. With this perspective, a potential real estate investment is more likely to be identified by a contrarian approach to investment analysis and research when the prevailing real estate trends are negative. However, this is just one of several methods for selecting investments.

Long-term Investment Strategies

The components of a successful long-term investment strategy are not the same for each individual because of differences involving risk tolerance and specific financial goals. Here are several principles of long-term investing that you should review and consider for your own unique investment choices:

• “Buy and hold” investments can be a flexible choice when they are producing income during the holding period (for example, income properties or common and preferred stocks paying dividends).
• A “due diligence process” is helpful for identifying financial risks before making an investment.
• Long-term investment strategies require the patience and discipline to apply financial principles over a lengthy period of time.
• It is essential for each investor to decide in advance how much investment income and growth is required to reach a future cumulative asset goal.
• Small investments made regularly can produce impressive returns over the long haul in spite of periodic market fluctuations.
• Specialized investment research is a practical and prudent tool used by long-term investors.
• The long-term impacts of inflation cannot be ignored when selecting long-term investments.

The last point is critical because some potential choices for long-term investing will produce annualized returns that are less than the recent rate of inflation. For example, the current rate of return for certificates of deposit and conservative government bonds is less than the annual rate of inflation (just under 4 percent) experienced in the United States during the past 50 years. In making their financial choices, long-term investors should decide how to address inflationary concerns.

– Research Optimus