Long-Term Investing: What, Why, and How
Every well-balanced financial strategy includes a mix of short- and long-term investing. Both play their own strategic role in helping to generate value, and do so in a way that helps mitigate exposure to different types of risk.
In particular, long-term investments—which can include equities, bonds, mutual funds, or alternative asset classes—drive different types of value than those with shorter periods to maturity. Understanding the opportunities to earn long-term dividends can help investors with smart portfolio allocation and maximizing returns.
What is long-term investing?
Long-term investments are a strategic set of assets designed to be held for a long period of time—typically a year or longer. Think of long-term investing as an umbrella category for a wide variety of investment options that are designed to be held for the long-haul. Each tends to possess a few common characteristics: they’re generally low-risk, generate passive income, and offer a relatively steady rate of return over an extended period of time.
How does long-term investing work?
Generally, each long-term investing strategy follows a few overarching tenets. Long-term investments are typically seen as a less volatile place to store capital—the rate of return may be lower than that of a higher-risk investment, but the chance of the investment going bust is considered less likely as a result. The main imperative behind a well-performing long-term investment is to generate passive income, and make your capital work for you without aggressively putting money into quick-turn equities.
There’s a wide variety of long-term investment opportunities. Some, like mutual and index funds, offer a lower rate of return than individual stock investments (which are also more risky due to market conditions). Others, such as some alternative investments, can be a bit higher level—and a little more creative at that. These alternative asset allocations can take many shapes, including commodities investing, direct investing in individual businesses, or investing in real assets. Many alternative investments are specifically structured to protect investors from the effects of daily market fluctuation, and hedge portfolios against this risk.
It’s important to note, however, that long-term investing strategies differ depending on what assets are in a portfolio, their performance, and the goals of the person who holds them.
Why is long-term investing important?
Long-term investments are primed to generate passive income over an extended period, which is something that few short-term investments can guarantee. Long-term holdings can also hedge against short-term plays, thus softening the blow if more volatile holdings lose value or fail to meet financial goals. Diversification is a crucial component of any well-designed investing strategy, and long-term holdings are some of the main pillars that help stand up a diversified portfolio.
Long-term investing risk and returns
Above all else, savvy long-term investments can help ensure that your portfolio keeps pace with inflation and meets the market’s rate of return. Most long-term investments aren’t primed by design to beat the Dow Jones Industrial Average or other broad metrics that signal overall market performance. Instead, they reward a conservative investing approach with more modest gains, all without the same market exposure that comes from more aggressive holdings.
Although most long-term investments aren’t designed to create outsized returns, they can help add to one’s bottom line and help preserve value on returns of past investments. Plus, long-term investments can serve as a less risky investment opportunity during periods of mixed returns, coming as close to recession-resistant investing as many may find during a period of volatility.
Importantly, however, having a long-term investing strategy doesn’t mean that you’re entirely protected from risk; rather, these types of allocations help minimize your exposure to risk, putting in place a stable foundation that enables you to make other high-risk, high-return short-term moves.
Long-term investments in alternative asset classes
As we touched on briefly, long-term investing doesn’t just have to take the form of mutual funds, CDs, and other commonplace financial products. Rather, investors commonly look to several alternative asset classes for passive income and a steady rate of return as part of a diversified portfolio.
Alternative investment opportunities take the form of real estate, commodities, insurance, and venture capital, and more. Each investment in alternative asset classes can fit a unique need within the investor’s portfolio. For some, these investments offer further diversification; for others, they can help generate returns without being tied to market movement. And, during periods in which many stock prices are seen as too high to yield a notable return for new investors, alternative asset classes may deliver a better yield as well.
Some investors also pursue long-term investments in alternative asset classes due to their unique value propositions. Investing directly in a new company or business is a common alternative asset investment: most of these investments also take a multi-year view before investors can begin to see returns. (These investments are designed to beat the market’s typical rate of return, but take longer to do so.)
Similarly, there are alternative investments that individuals can make in entire industries or emerging sectors, such as agriculture investing. These are generally facilitated through professionals that do the due diligence to spot the right opportunities, and are usually open only to accredited investors.
Farmland investing as a long-term strategy
The market is coming off a remarkably long bull run in 2020. There are also external factors that make it challenging for investors to know where to place their long-term investments. The current market uncertainty doesn’t follow conventional patterns, making it hard to build a stable long-term investment portfolio through shares and stocks alone.
This is where alternative investments can add significant value to a portfolio. The need for sustainable agriculture has never been more apparent: consumer demand has proven to be recession-resistant, and new farming technology holds the promise of revolutionizing how the country’s farms operate. Farmland investing provides an alternative to unpredictable markets, while offering investors with opportunities to reap dividends in the process.
Vetting long-term investment opportunities
Finding the right long-term investments means understanding the space in which you want to invest. Beyond familiarity with the basics of an industry or sector writ large, it’s also important to perform due diligence to verify that the nuts and bolts of the investment you’re considering check out.
The due diligence process is especially important when examining alternative asset classes and investments that may not have the same notoriety or track record as traditional long-term financial instruments. You can perform due diligence yourself, but you may be better served working with financial professionals who can do it for you; they’ll have a depth of knowledge about the sector and investment, and the experience to more accurately identify if the investment is a good fit for you.
For farmland investing, FarmTogether completes all the due diligence on your behalf, lowering the bar to entry for investing in agriculture as an alternative asset class for your portfolio.
Learning more about agriculture investing
Just because low-risk investments tend to get the lion’s share of attention when discussing long-term investing strategies doesn’t mean they’re the only place for your capital. As you look into the best long-term investment opportunities, farmland investing can be an excellent way to diversify your asset allocations and create a long-term passive investment stream. Learn how FarmTogether can connect you with agriculture investing opportunities.
Disclaimer: FarmTogether is not a registered broker-dealer, investment adviser or investment manager. FarmTogether does not provide tax, legal or investment advice. This material has been prepared for informational and educational purposes only. You should consult your own tax, legal and investment advisors before engaging in any transaction.