Long-term investments are those you intend to own for five years or more. Financial advisors generally say the best long-term investment is a low-cost index fund that tracks a stock market index, aiming to mirror its returns. However, there are other long-term investments worth considering, too, depending on your needs and risk tolerance.
Best long-term investments
A long-term investor typically looks for investments that take more risk to reap potential long-term returns. However, the actual length of "long-term" can vary widely. In this article, we'll stick to the definition above: investments for money you won't need for at least five years.
1. Equity index funds
- Potential return: 10% for a long-term historical average.
- Pros: Long-term growth; diversification.
- Cons: Higher risk; minimum investment requirements; fund fees.
One of the best ways to build a diversified portfolio is to purchase low-cost equity index funds. These funds track a stock market index by mirroring its makeup and therefore performance.
Look for a no-transaction-fee fund with a low expense ratio (annual fee) that invests in a broad market index — the S&P 500 is a good example. Another good example is a total stock market index fund, which gives you exposure to a broad range of U.S. stocks. As you add more money to your portfolio, you can diversify further by buying index funds covering international and emerging markets equities.
2. Equity exchange-traded funds
- Potential return: 10% for a long-term historical average.
- Pros: Long-term growth; diversification; low minimums; tax efficiency.
- Cons: Higher risk; fund fees.
An exchange-traded fund (ETF) is similar to an index fund, but it trades like a stock. You buy shares of the ETF rather than depositing a fund minimum, which makes these funds easier to get into if you’re starting with a small investment and easier to diversify because you may be able to buy several funds with a relatively small amount of money.
ETFs also offer all the same perks as index funds: Passive management that tracks an index, low expense ratios (in many cases — but never assume a fund is inexpensive just because it’s an index fund or ETF), and the ability to buy a basket of investments in a single fund.
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3. Robo-advisor portfolio
- Potential return: Varies based on investment mix.
- Pros: Hands-off diversification and rebalancing; portfolio management; tax efficiency.
- Cons: Algorithm makes the decisions; management fees; possible account minimum.
Robo-advisors aren’t an investment themselves but a way to invest. These automated services use details about your time horizon, goals and risk tolerance to algorithmically create a portfolio for you. Often, the portfolio is a mix of ETFs in either an IRA or a taxable brokerage account.
The robo-advisor automatically rebalances your portfolio from time to time. If your money is in a taxable account, the robo-advisor might also automatically perform tax-loss harvesting to lower your tax bill. Robo-advisor fees are somewhat lower than fees for a human financial advisor.
4. Dividend stocks
- Potential return: Around 5%, based on the dividend aristocrats, in addition to any long-term price appreciation.
- Pros: Generate income; lower volatility than some stocks, such as growth stocks.
- Cons: Higher risk; requires researching individual stocks; overall return can be lower.
Dividend stocks are individual stocks that pay a steady stream of income to their investors in the form of a dividend. Dividends can be paid annually, semi-annually, quarterly or monthly; the most common arrangement is quarterly. If you don't need the income, you can use the dividends to purchase more shares of the stock (this is called a dividend reinvestment plan), increasing your overall investment and potentially compounding your returns.
5. Dividend ETFs
- Potential annual return: Varies, but currently around 4% to 9%, in addition to any long-term price appreciation. A higher yield can mean taking on more risk.
- Pros: Generate income; diversification.
- Cons: Higher risk; overall return can be lower.
Dividend ETFs can help reduce or eliminate the effort involved in researching individual stocks. Like other ETFs, dividend ETFs essentially pool many stocks together into a single investment. Similar to dividend stocks, you can reinvest dividends from dividend ETFs back into the fund.
6. Target-date funds
- Potential annual return: Varies based on fund and target date.
- Pros: Hands-off diversification and rebalancing; portfolio management.
- Cons: Management fees; investment minimum.
Target-date funds are a "set-it-and-forget-it" option for investors who have a fixed long-term date in mind. The fund automatically rebalances over time, taking more risk early on and less as you get closer to your set goal. Target-date fund names typically include the target year.
These funds are common in retirement accounts and other long-term investment accounts, such as college savings accounts, but they can also be purchased through most standard brokerage accounts.
7. Real estate
- Potential annual return: Varies.
- Pros: Potential for high returns; diversification against other investments you own, such as stocks.
- Cons: High risk; may require time; costs can be high.
When people think of investing in real estate, they generally picture purchasing property, which is certainly one way to approach it. But there are lighter-lift ways to invest in real estate as well, including real estate investment platforms that act as a middle party between investors and properties, and real estate investment trusts (REITs), which are purchased much like stocks or mutual funds.
REITs are companies that own real estate — think shopping malls, warehouses or hotels. REITs typically pay dividends and offer investors exposure to real estate without requiring you to actually own the property directly. There are also REIT ETFs.
8. Bond funds
- Potential annual return: 4% or more for U.S. government bonds, more for those who take on more risk.
- Pros: Liquid.
- Cons: Some risk of principal loss; funds charge expense ratios.
Bonds are loans you make to a company or government in return for interest payments. As with any loan, they’re not risk-free. For one thing, the borrower could default, although that’s less likely with an investment-grade corporate or municipal bond and very unlikely with a U.S. Treasury bond.
Through an online brokerage account, you can buy a low-cost index fund or ETF that holds corporate bonds, municipal bonds, U.S. government bonds or a mix of all of the above. This will diversify your investment, as the fund holds many bonds.
A fund screener can help you sort funds by performance, expense ratio and more. If you're not investing in a retirement account, you might consider a municipal bond fund; municipal bonds are federally tax-exempt, making them a good choice in a taxable account.
9. Long-term CDs
- Potential annual return: Around 4%.
- Pros: Higher interest rate than a savings account; FDIC insurance.
- Cons: Not liquid; may have a minimum deposit requirement; lower potential return than stock market investments.
If you know you won’t need money for a set period and don’t want to take a lot of risk, a CD might be a good choice. You can find CDs with terms ranging from three months to five years or more. In general, the longer the term, the higher the interest rate.
CDs aren't ideal in a rising interest-rate environment because they lock your money away at a fixed rate, with a penalty of three to six months’ interest if you withdraw early. Being stuck in a low-rate CD while interest rates are climbing can feel like missing out on a party. But when interest rates are expected to go down, locking in a high rate with a CD can be appealing.
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