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Table of Contents
As the name suggests, investing for the long-term means keeping hold of investments for years, if not decades.
This strategy aims to help investors ride out the ups and downs of the market, and hopefully achieve stronger returns than they would with cash savings.
Below, we explore how long-term investing works, and how different types of investment fit in.
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Why invest for the long-term?
The worldwide economy has gone through plenty of adversity over the decades and yet, over time, the stock market has managed to continue climbing.
According to Kate Howells, wealth manager at BRI Wealth Management, “a golden rule of investing is that you need to be in it for the long haul”.
For those in a position to do so, investing money rather than keeping it in cash traditionally offers the potential for higher growth in the long run.
– Dean Butler, managing director for retail at Standard Life
According to analysis by wealth manager, Brewin Dolphin, if an individual invested £100 in the FTSE All-Share index in January 1997, their investment would have increased in value to £278 by the start of 2022 assuming a total real return basis (accounting for share price changes and dividend income as well as adjusting for inflation but before fees).
By contrast, a similar size investment in a typical savings account would have turned into just £120 after adjusting for the erosive effects of inflation.
Brian Byrnes, head of personal finance at Moneybox, says: “If, as investors, we can keep a sensible amount in cash savings, use our available tax wrappers [such as individual savings accounts] efficiently, and invest regularly into long-term diversified portfolios, the unpredictable nature of markets has less impact on us than it does for those investing for short-term gain.”
But what are the best long-term investment options? The answer depends on an individual’s circumstances, financial goals, and levels of risk tolerance.
Below, we explore three tried and tested investing options.
Investing in stocks and shares
Stocks and shares are perhaps the best-known option when it comes to long-term investments.
Keen retail investors may research the market, aiming to make money from individual company shares. With a wide selection of trading platforms and investment apps now available, these ‘DIY’ investors have plenty of options for buying and selling shares.
Investing in individual companies is much riskier than investing in funds (see below), however. By investing in a small handful of companies, investors effectively place all their eggs in one basket. If a single company underperforms, it will have a large impact on the value of their overall portfolio.
Generally, investing in shares is only suitable for individuals with a time-frame of least five years, and a high tolerance for risk.
While increased activity is a natural response to the uncertainty and perceived potential for profit or protection, it is important to remember that investing is a long-term discipline.
Given the intrinsic ups and downs in markets, the key to success is avoiding knee-jerk decisions and maintaining a well-diversified portfolio.
– Myron Jobson, senior personal finance analyst at interactive investor
Risk and return
By selecting individual stocks, it’s possible to achieve greater returns than a funds-based approach.
But the trade-off is greater risk, and the potential for greater losses.
It’s possible for stock market indices to lose 20% or more of their value over the course of a single trading year. Declines of this magnitude are often referred to as a ‘bear market.’
That said, whole markets have never ‘zeroed out’ – in other words, hit absolute rock bottom. On the other hand, individual publicly listed companies occasionally fail, especially during times of economic hardship. When this happens, shareholders can lose a large proportion, if not all, of their money.
Adrian Lowery, financial analyst at wealth manager Evelyn Partners, says lower asset prices are not all bad for regular investors with a long-term view, however.
He says: “As long as you do not need to access your investments before asset prices recover, and you are buying into the market at regular intervals, then falling markets are not wholly a bad thing.
“Keeping up payments, if it can be done, will take advantage of lower asset prices and the compounding power of early savings.”
Investors willing to take on the risk of individual stocks are usually best-served by sticking to so-called ‘blue chip’ companies offering solid, long-term performance. Their share prices are less likely to suffer from major swings than newer, smaller companies, and some – especially those from ‘defensive’ sectors such as energy, utilities and mining – may pay dividends.
A dividend is a non-mandatory distribution, usually in cash, paid by a company out of its earnings to shareholders.
Investing in funds
Investment funds offer an alternative way to gain exposure to stocks and shares. Funds invest in a wide array of different shares, and are managed by investment professionals.
There are thousands of funds to choose from, each managed on either a ‘passive’ or ‘active’ basis.
Passive investing
The aim of passive fund is to copy the return achieved by a particular stock market index, using computers to maintain a portfolio of shares that replicates the performance of the target index in question.
This could mean reproducing the performance of the FTSE 100, the UK’s index of leading company shares, or the influential S&P 500 in the US, for instance.
It’s also possible to track the performance of more tangible commodities such as precious metals, including gold.
To invest passively, retail investors – everyday consumers – typically rely on two main products: index tracker funds and exchange-traded funds (ETFs).
In 2024 alone, European passive funds saw inflows of more than £25.7 billion, according to Morningstar data.
Investing in just one stock-based fund, such as a FTSE 100 index tracker, providers investors with exposure to numerous shares – allowing them to benefit from diversification.
We regularly ask investment experts to highlight the index trackers and ETFs that they think would suit investors with different risk profiles.
Active investing
With active investing, fund managers aim to outperform a particular stock market index or benchmark using a combination of analysis, research and judgement.
Active funds invest in a basket of companies chosen on investors’ behalf by a portfolio manager. Contributions are pooled from potentially thousands of investors, with the proceeds managed according to strict investment mandates, each with a particular target.
This might include outperforming a benchmark stock index, such as the FTSE 100, by a specified amount each year, say, 1%.
Because of the way they work, active funds tend to cost more than passives. Investors must weigh up these costs against the potential for superior returns than those achieved by simply tracking an index.
We also asked experts to select funds from specific investment sectors (UK, US and global) that would be suitable for investors with different risk profiles, as well as funds aimed at investors looking for ‘safe haven’ portfolios.
Growth or value?
When making long-term investments in the stock market, investors may come across the twin concepts of ‘growth’ and ‘value’ investing.
Growth stocks and funds aim to provide their investors with returns by focusing on companies likely to experience rapid price appreciation. Growth stocks tend to perform best when interest rates are low and when economies are growing. Between 2010 and 2020, the US market was powered by a large number of growth stocks including technology giants Apple and Microsoft.
Apple share price
The graph below displays the past performance of Apple. Past performance is not a reliable indicator of future results.
Investments in a currency other than sterling, are exposed to currency exchange risk. Currency exchange rates are constantly changing which may therefore affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin.
Value funds, on the other hand, aim to invest in companies that are unloved or have been undervalued by the market.
Suggested Read: Best Undervalued Stocks
Value investing incorporates a strategy of buying shares that investors believe are trading at a discount to their intrinsic value. The belief is that a company’s share price will rise in the future when it is revalued by the market.
Investing in bonds
For individuals who aren’t comfortable with the risks associated with shares or fund investing, another option to consider is gaining exposure to bonds.
Bonds are a type of loan issued by governments and companies, with interest paid to investors.
There are various types of bonds. Historically, certain bonds have been considered less risky than investing in shares or shares-based funds, because they provide regular income payments and entitle their owners to receive payment before shareholders if a company folds.
Bonds are also referred to as ‘fixed-interest securities’. In effect, these are IOUs issued by governments and companies that can be traded on the stock market.
The UK government issues bonds known as ‘gilts’, while their US government equivalents are called ‘Treasuries’. IOUs issued by businesses are referred to as ‘corporate bonds’.
In each case, the institution issuing the bond does so in exchange for a loan. Gilts and Treasuries represent government debt, while corporate bonds equate to company debt and are considered a higher risk because they are guaranteed only by the companies that issue them.
The last few years have been challenging for investors with much of that time characterised by a lengthy period of rising prices, while the terrible war in Ukraine gave inflation an unwanted boost. In these tough conditions, it is important investors have a diversified portfolio and take a long-term view.
–Annabel Brodie-Smith, communications director, Association of Investment Companies
How do bonds work?
A loan may last for as little as a few months or, in the case of government debt, can extend to several decades. In exchange for their cash, bondholders typically receive a regular interest payment, and the outstanding loan is later paid back when the bond matures.
The annual interest paid over the lifetime of a bond is known as ‘the coupon’ and is expressed as a percentage of the face value of the bond. The coupon may also be referred to as the ‘nominal yield’.
For example, a conventional UK gilt might be described as ‘3% Treasury stock 2030’. The 3% refers to the coupon, in other words, how much interest an investor would receive each year (usually paid half-yearly). ‘Treasury stock’ means you’re lending to the government and ‘2030’ refers to the bond’s redemption date. This is when the bond holder receives back their original investment.
The size of the interest payment typically reflects the relative security of the IOU in question. The higher the coupon, the riskier the bond.
Global independent ratings agencies, such as Standard & Poor’s, Moody’s and Fitch Ratings, provide credit risk ratings for both government and corporate-backed bonds.
Bonds were once viewed as a means of earning interest while preserving capital. But today’s bond markets are complex, and worth a staggering £105 trillion worldwide according to the Securities Industry and Financial Markets Association.
For many investors, bonds are an important long-term investment thanks to their income-producing credentials.
Typically, the main way for investors to gain exposure to bonds is by investing in a specialist fund.
Different types of bonds have unique characteristics influencing their risk and return profile. Understanding how they differ and the relationship between the prices of bond securities, market interest rates, and the different risk levels the bonds carry is crucial before investing.
Riding out the ups and downs
When investing, individuals should keep their ultimate financial goals in mind and be prepared to ride out stock market ups and downs.
There’s also a cost consideration to be made with any kind of investing. Many investing platforms charge fees for buying, selling and holding investments.
Investing in shares may also mean tax considerations*, for example when it comes to selling all or part of a portfolio.
Before taking the plunge with any form of stock market-linked investment, consider the following questions:
- Should I take professional financial advice?
- Am I comfortable with the level of risk and can I afford to lose money?
- Do I understand the investment in question and could I retrieve my money from it easily?
- Are my investments regulated?
- Am I protected if an investment provider or my advisor goes out of business?
*Tax treatment depends on your individual circumstances and may be subject to future change. The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of tax advice.
‘Time is your best friend’
There’s no such thing as risk-free investing – however long-term the approach.
But with the help of diversification, many risk factors can be mitigated, smoothing the path, hopefully, to financial success.
Rob Morgan, chief investment analyst at wealth managers Charles Stanley, advises would-be investors that “time is your best friend”.
He says: “Don’t underestimate the power of even modest investments early on in life. You don’t have to shoot for the moon. In fact, a more measured and disciplined approach is likely to be more sustainable and reliable over the longer term, than chasing the latest fad or fashion.”
