Long term investments account on the asset column of a balance sheet of a corporation or company. It depicts the investments the company has made in the fiscal year. Long term investments generally include bonds, stocks, cash and currencies, and real estate. Long term investments, by definition, includes all the assets that a company holds for a year or more.
The difference between short term investments and long term investments is that short term investments are bought to be sold within a year or so. On the other hand, long term investments are to be kept for years and sometimes for eternity.
Long term investments are non-current assets and are not used in day to day operations and activities for generating revenue. They create other income for companies outside the general operations.
Bonds, stocks and other such securities are considered to be long-term investments when held for long durations. Such securities were conventionally never used in operating activities by companies.
But sometimes corporations and companies invest in assets that are used in day to day operations but are held as long term investments.
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Long term investments: A detailed explanation
The most common type of long term investment is when a company (x) invests significantly in the company (y) and has a pretty good impact on the company (y). Now in such a scenario, the investment would be seen as a long term investment.
When a company purchases stocks or bonds as investments from other companies, their categorisation in the balance sheet will comprehend whether they are classified as long term or short term investments.
When short term assets lose value or depreciate, it is seen as a loss and is tagged to the market.
But when the value of short term investments rises or appreciates, it is not taken into consideration until the asset is sold.
For this reason, the classification of assets (both long term and short term) have a direct, proportionate influence on the net income of the company.
- Investments held till maturity:
When a company depicts its ability to keep an investment till its expiration or maturity date, then the investment is noted as a “held till maturity” investment. There are no adjustments made for interim or small fluctuations in such long term investments. They’re typically written down to depict a proper decreased value.
- Trading and available for sale investments
Investments which are sold within one year to make short term gains are categorised as current or trading investments. A trading investment cannot be seen as a long term investment for obvious reasons. But sometimes such assets are held to be sold in the future.
Types of long term investments
- Stocks
In many aspects, stocks can be considered as long term investments. They provide the following advantages in the long run:
- They’re on paper investments. This means there is no physical entity like a business or a property that has to be managed.
- Stocks provide investors to be a part of the companies they are investing in. When investing in stocks, you’re actually investing in the economy.
- When invested as a long term asset, stocks can be beneficial and may rise exponentially.
- Most stocks include dividends, which means a stable income for the long run.
There are two types of stocks:
- Growth Stocks
These stocks are inclusive of companies whose core attraction lies in long term growth.
Growth stocks often pay no dividends. The profits are pulled back inside the company for reinvestment in growth instead of distributing dividends among shareholders.
One classic example of a super successful growth stock can be none other than Apple. At current times, Apple stocks are about 210 dollars per share.
- Dividend Stocks
On the opposite of growth stock, stand dividend stocks. Dividend stocks are issued by corporations and companies that tend to pay a fair amount from the gains and profits to the stockholders.
High dividend stocks are meant to pay higher gains than other investments which are by large fixed. Dividend stocks also account for appreciation of capital. The reason why many investors go for dividend or high dividend stocks is they make the whole game of stock investing pretty less volatile as compared to growth stocks.
One example of a high dividend stock company is General Electric, with a dividend rate of 3.61 per cent at current times.
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- Bonds (long term)
Bonds (long term) are securities with interest, which are held for more than ten years. Generally, such bonds are held for 20 to 30 years.
There are various kinds of bonds that function in the long term. Some of them are corporate, municipal, international, and governmental bonds.
The key feature of bonds is the interest rates they carry. Being long term, they pay much higher rates than most short term investments.
Bonds can become one of the best long term investment assets when interest rates are lesser than the rate at which the bond was purchased. This way, the value of the bond rises.
- Mutual Funds
Mutual funds are active-managing funds as they not only twin with the market index but also outdo it.
There is a wide range of implications that are criteria used by investors while selecting mutual funds. But it all majorly depends on the purpose that mutual funds ought to serve.
- ETFs – Exchange-Traded Funds
Similar to mutual funds, exchange-traded funds also represent an anthology of bonds, stocks, and other long term investments.
But on the contrary side of mutual funds, exchange-traded funds are not actively managed.
ETFs tend to have lower costs as compared to mutual funds. The main cost comes from the commission that is to be given to brokers.
They even necessitate lower capital investment than mutual funds because they can be easily bought on per share system.
- Property and real estate investment
The best way to invest in property or real estate is to find someplace that is becoming a popular destination or area, a hotspot, etc.
Investing in real estate and property can be seen as an alternative to investment in stocks because they tend to produce similar kinds of gains and returns.
The most optimal way to invest in real estate is to buy your own house. Unlike other instruments and securities, real estate provides space for high leverages.
- Cash Equivalent Investment
Cash equivalents include deposit certificates, saving accounts with broad interests, funds of money market, etc. These long term investments are considered safer than other instruments because of the stable rate of return that they entail.
However, most of the time, the rate of interest is low and isn’t suitable for investments like retirement plans.
Tips for effective long term investment
- Understand the markets of long term investments. Study different markets and their implications on long term investments. Also, understand the merits and demerits of different investment instruments – bonds, mutual funds, stocks, etc.
Thorough research can never go wrong.
- Do not fret over short term fluctuations of an investment. Instead, focus on the bigger picture. Trust the larger anecdote of an investment and do not get carried away with short-lived volatility of the investment.
It is the job of an active trader to look for short term gains and changes in prices. Long term investors embark their journey of success, focusing on long periods that last for years.
- There is a wide range of ways and strategies available to pick your instruments, especially stocks. Try to stick with one. Do not run your mind on various tracks; you will end up lost.
Keep in mind that successful long term investors stock with one strategy that works best for them.
- Do not get carried away with hot tips. No matter how enchanting the offer sounds, do your one analysis and never trust anything or anyone else. Do not risk your hard-earned money just like that. Tips can sometimes be really usable and beneficial, but you need to be able to rely on it with some trustworthy source. Otherwise taking such a big risk is not worth it.
- Instead of basing your decisions on the past performance of a security focus on the long term perspective. Yes, past data can help in making some sound decisions, but no one can guarantee that. It would help if you remember that a security’s value could be determined from the past performance, but there is no promise of it performing the same way in future. Instead, base your decisions on fundamentals and potential in future.
- Expand your mind from conventional ideas. Many companies have a rich history, but there are some excellent companies that might lack branding. Also, there are a lot of small ventures that have the potential to perform successfully. In point of fact, small capital companies tend to perform with greater returns as compared to companies with large capital.
- It is vital to match your investments with your financial goals. Every long term investment you land yourself into should have an aligned life goal with it. This will give you a structure and clarity of time that will be taken to achieve your goals.
- It is best to start investing early. This will give you the required discipline that will go a long way. This will result in compounding power. Compounding will help your instruments generate gains on their own after a while with lower investments that you make at an early stage.
- It is also advisable to analyse the performance of your investments on a regular basis. Keep comparing the gains generated in the current year from the previous year to measure the growth of the security.
- While pursuing long term investing, make sure to make up an emergency fund that will manage your financial expenses for at least 9 to 10 months in a go. This fund should cover up expenses like rent, EMIs, premiums, tuition fees, daily expenses, etc.
Why go for long term investing?
- Long term investing gives you ease from fretting over any fluctuations that happen now and then with the security. You don’t have to sit on the edge of the chair every time the market jumps to sell off your security. Instead, you focus on the actual meat of the security and the inner workings of it. This way, you look out for the long term growth, leaving the frolicsome worries behind.
- Buying stocks and other securities as long term investment allows you to take value from compounding. Compounding, in the long run, increases the potential gains, when security starts making money for itself. Here, time works as a best friend for securities.
- One of the best features of long term investment is that anyone can pursue it. It won’t discriminate between a naive, new investor and an expert much. You cannot always be right, that’s true, but even experts and most successful long term investors go wrong at times. But with long term investments, there are no strings of various trading styles, complex momentum strategies attached.
- One of the most notable advantages that come with long term investing is sound sleep. Yes, you will sleep better as a long term investor because you do not have to be at the beck and call every morning for the market to open and see how your stock or others security is performing. Most of the time, in the long term, you invest with companies that have a goodwill in the market, and therefore there are fewer chances of volatility.
- Mistakes are inevitable. But in the long term investment, you’ve pretty good chances of using an eraser and correcting your investment mistakes. Riding for a long time helps to heal some, if not all, wounds.
- Finally, you will have to pay fewer taxes when pursuing long term investments. Short term traders pay taxes on top tax rates of margin. This can range from 10 to 40 per cent. But long term investment accounts for 20 per cent of tax rates at the maximum, based on your income. Holding stocks for a longer time saves a lot of money.
Bottom Line
The best way to go about long term investments is to put money around different instruments and not to focus all your money on a single instrument or security, this way the investor can also diversify the portfolio, and at the same time reduce the risks.
Long term investments are suitable for those who have some extra cash that can be used to make more money.
It is better to start pursuing long term investments early in life to maximise gains at your golden age. Long term investments can prove to be an excellent way for a secure future. It is always advisable to seek help from experts and financial advisors before making any big investment decisions.