Long-term investments: how to choose the right option for you
Are your financial goals future-proofed? Long-term investments come in all shapes and sizes to help you get ready for the future. Here are the options — which one is the right fit for your goals?
6 min read
Good things come to those who wait. When it comes to growing your money, that couldn't be more true! Long-term investments are like planting a tree: They need time, patience, and a bit of care, but eventually, they can grow strong and fruitful.But how do you figure out which kind of investment is right for you? With so many options, long-term investments can feel overwhelming. In this article, we’ll break down the basics, compare some popular choices, and give you the lowdown on how to pick an investment that suits your goals and risk tolerance.
What is long-term investing?
Long-term investing means putting your money to a certain use with the expectation that its value will grow over an extended period, typically five years or more. This investment strategy is about patience and commitment, as the goal is to reap substantial returns over a longer time horizon rather than going after quick gains.It's a popular strategy with investors since the benefits include compound interest, which often turns even modest contributions into significant sums. Plus, long-term investing can help with weathering market fluctuations. Financial markets naturally go through ups and downs, but when you make long-term investments, you can ride out the short-term volatility and benefit from the overall upward trend of the market.
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So, you're ready for long-term investing — but where do you start?With so many choices available, it’s important to understand the different paths you can take to grow your wealth. There's something for everyone, from stocks and real estate to mutual funds and bonds. Let’s look at the various ways you can invest in your future.
Stocks and stock funds
Investing in individual stocks involves buying shares of specific companies, giving you a direct stake in their success. In Europe, some prominent stock indices include the DAX (Germany), which includes major German companies such as Siemens, BMW, and Deutsche Bank, and the CAC 40 (France), which has leading French companies like L'Oréal, TotalEnergies, and Airbus.If picking individual stocks feels daunting, stock funds are a good alternative. These funds pool money from many investors to buy a diversified portfolio of stocks, offering a spread of investments across sectors and countries. These can be mutual funds or Exchange-Traded Funds (ETFs).When you invest in individual stocks or stock funds, you tap into the growth potential of European companies — and ideally, you diversify your portfolio to manage risk.
Bonds and bond funds
Bonds are issued by national governments and are considered one of the safest investment options. They’re backed by the credit and taxation power of the issuing country, and depending on which country you buy them from, they’re relatively low-risk investments. Countries like Germany (Bunds), France (OATs), and the UK (Gilts) have strong credit ratings, ensuring that their bonds are reliable. The trade-off for this safety is generally lower returns than other investment options. However, they provide stability and can anchor a diversified portfolio, especially in uncertain economic times.European corporate bond funds can be attractive for those willing to take on a bit more risk in exchange for higher yields. Since they carry more risk, these types of bonds typically offer higher interest rates.
Real estate
Buying homes, apartments, or rental properties can provide a steady income stream through rent and potential appreciation in property value over time. This option lets you directly manage your investment and benefit from tax advantages like mortgage interest deductions.Office buildings, retail spaces, or industrial properties can yield higher rental income than residential properties. These investments often come with longer lease terms as well, providing more stability. However, it takes significant capital and a good understanding of the commercial real estate market to get into this type of investing.European Real Estate Investment Trusts (REITs) might be a viable alternative for those who want exposure to real estate without the hassle of managing properties. REITs own, operate, or finance income-producing real estate across various sectors. Investing in a REIT allows you to access a diversified portfolio of properties, from office buildings and shopping centers to apartments and hotels.
Target-date funds
Target-date funds, or lifecycle funds, simplify long-term investing by automatically adjusting the asset allocation based on a target retirement date. While these funds are more common in the U.S., they’re gaining traction in Europe.When you invest in a target-date fund, you choose a fund with a date closest to when you plan to retire (e.g., 2040, 2050). The fund managers or companies then adjust the mix of assets to become more conservative as the target date approaches. This means more growth-oriented assets when the target date is far off, gradually shifting to safer investments like bonds as the date nears.
Robo-advisors
Robo-advisors are automated investment management services that use algorithms and data-driven strategies to manage your investment portfolio. They provide a convenient, cost-effective way to start long-term investments, making sophisticated financial management accessible to a broader audience. The robo-advisor trend is rapidly growing in Europe, as more investors seek straightforward, tech-driven solutions for their financial planning needs.
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To create a long-term investment strategy that aligns with your financial situation and goals, here are some important steps to take:
Assess your risk tolerance. Your risk tolerance is your ability and willingness to endure market volatility and potential losses in pursuit of higher returns. Understand how much risk you’re comfortable taking.
Define your investment goals: Clearly outline what you’re investing for — like retirement, buying a home, or something else. Your goals will help shape your investment strategy.
Determine your investment timeframe: How long do you plan to keep your money invested before accessing it? Knowing when you’ll need to access your money will influence your asset allocation.
Diversify your portfolio: Diversification means spreading your investments across different asset classes. The goal is to reduce and manage risk while achieving consistent returns.
Everyone’s financial situation is different, so carefully consider these factors to create a well-rounded investment strategy that reflects your goals and needs.
What else should you consider as a European investor?
Each European country may have specific regulations governing long-term investments, including rules on disclosure, investor protection, and taxation. Make sure to familiarize yourself with the regulations in your country so that you stay compliant with the rules and don’t run into regulatory problems.On top of that, European countries have varying tax rates on capital gains, which are the profits you make from selling investments. Knowing how these taxes apply to your investments can help you plan your strategy accordingly.These two factors — understanding the tax implications and regulatory environment for long-term investments — are essential for European investors who want to make savvy decisions and maximize their returns.
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Disclaimer
These statements do not constitute investment advice relating to any financial instrument. Financial instruments can be subject to high fluctuations in value. A decline in value or a complete loss of the money invested is possible at any time.
FAQs
Long-term investments have different fees that can vary widely depending on the investment vehicle and provider. For example, actively managed mutual funds often have higher management fees than passively managed index funds or ETFs. Financial advisors may charge advisory fees or commissions for their services. Real estate investments may come with property management fees and maintenance expenses.
Even small contributions can compound over time to help you achieve your long-term goals. Regularly review and adjust your investment strategy as needed to stay on track. Consulting with a financial advisor can provide personalized guidance based on your circumstances and goals.
Yes, many European countries offer government incentives to encourage long-term investing. Some governments also provide tax breaks or incentives for investments in specific sectors or industries, such as renewable energy or small businesses. Certain savings and investment products may also qualify for preferential tax treatment, such as tax-deferred growth or tax-free withdrawals under certain conditions.
Reputable financial news outlets such as Bloomberg, the Financial Times, and Reuters are good places to check regularly for comprehensive coverage of European financial markets and economic developments.
There are many alternatives to traditional long-term investments, including cryptocurrencies, peer-to-peer lending, venture capital, collectibles, commodities, private equity, structured products, and real assets like farmland or infrastructure. Keep in mind that these investments often come with increased risk, complexity, or illiquidity
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