Time is subjective, so it's no wonder that different investors have very different ideas about what constitutes a long-term investment strategy. To some traders, holding stock over more than a few months may already be counted as "long-term", while avid buy-and-hold experts will probably agree that holding an investment for five or more years qualifies you as a long-term investor. You could also look at the question from the liquidity point of view – any asset that can't be turned into cash within a year is generally thought to be illiquid, so we might say any investment of over a year counts as "long-term".
Note that long-term investments do not necessarily require you to put your money into illiquid assets. The defining feature of this investment style is that you hold onto your assets for a long time – even if they're highly marketable assets, like shares actively traded on the stock market.
The long-term investment style is any investing approach in which the investor buys assets such as stocks or bonds and holds onto them for a very long time. This style is not aimed at generating massive short-term returns by picking assets that are likely to rise or fall drastically over the coming months. Rather, you aim at a goalpost far down the road. You may receive regular dividends from your investments, of course, but the main goal is to buy stocks or bonds, which may rise significantly for many years. One typical example would be buying shares in a company that may not be the "new hot thing", but can offer a believable business plan that might turn the company into a market leader over time. Once that's happened, you may be able to generate massive profits by selling your shares at vastly increased prices compared to when you bought them.
If you're about to invest in a business venture that may not create significant returns for another ten years, you'll already have realized: Long-term investing takes preparation, patience, and perseverance.
Prepare Your Strategy Ahead of Time
You don't want to rush into the investing game, so coming up with a good plan is one of the most important things you have to do before you can start investing. You need to figure out which investment vehicles you'll want to invest in. For long-term investments, this usually means stocks and bonds. Stocks generally suffer from greater volatility, while bonds – and government bonds in particular – are considered to be less risky, though they provide smaller returns. Stocks are also more liquid, but this benefit isn't really of any concern to you if you're aiming to invest long-term. CARL strongly suggests you draw up an investment plan with a financial advisor, as we cannot provide you with financial advice that fits your financial situation. That being said, you should keep three things in mind when coming up with your investment plan:
- Time horizons: Different types of investments have different time horizons. For example, "T-bonds" issued by the US government typically mature in 20+ years, while "T-bills" mature within one year. Depending on your financial situation, it might be important to keep these differences in mind when deciding on assets to invest in. For example, you may put all of your money into T-bonds, which means you'll need to wait 20 years or more to get your principal back – all the while, your coupon payments are subject to changes in interest rates and inflation.
- Diversification: As always, diversifying your portfolio is a good way to limit the risk you're exposed to. If you invest in closely related industries (say, airlines and travel agencies), all of your investments may end up being impacted by the same macro-scale economic events (such as the COVID-19 pandemic). Avoiding such risky correlations by building a diversified portfolio is always a good idea.
- Liquidity: If you're planning on holding onto your investments for a very long time, you need to understand that you might not see your money again for a very long time either unless you abandon your entire plan. If you've invested in highly illiquid assets such as real estate, you might even be unable to turn your investments into cash quickly. Thus, your investment plan should always account for some of your money being put into a savings account or short-term investments instead. This ensures you will have access to the necessary liquid capital if you run into sudden financial obligations such as unexpected medical bills.
If you're looking for an easy way to diversify, you may also want to have a look at exchange-traded funds (ETFs), mutual funds, and hedge funds as a long-term investment vehicle. These funds put your money in a variety of stocks, bonds, or even derivatives, so they already follow their own diversification strategies. Hedge funds such as the quant's you'll find in the CARL app also typically invest in hedging strategies for risk minimization purposes, particularly if they're exposed to significant market volatility.
Once you have a plan, you need to stick with it. Long-term investment strategies won't provide the same long-term benefits if you change the plan frequently. This is where your personal discipline and mental fortitude may be taxed, as you need to stick with your investments even if bailing out might seem like the more sensible option in the heat of the moment. Long-term strategies are typically based on the idea that sudden price hikes and drops in the value of assets will ultimately "even out" over time. Like ships on the world's oceans, robust long-term investment strategies are too massive to be bothered by waves that might cause smaller vessels (in other words: short-term investors) serious trouble. Stay the course, and you'll eventually emerge at your originally planned destination.
Long-term investing also means you won't be chasing the latest hype on the stock market. If you're easily swayed by new and exciting investment opportunities, remember that trend-following goes counter to how long-term investing strategies work.
That being said, you might want to take some time every year to check in on your investments and carefully adjust them if necessary. For example, if your plan calls for you to receive a certain amount of dividends from shares in a specific company and the company has since issued new shares, this may mean you don't get the planned amount of dividends from your current number of shares – in this case, you may want to buy additional shares to stay within the parameters of the original plan. Likewise, if you've invested into ETFs, mutual funds, or hedge funds and those funds have changed their trading approach, you may want to take action. For example, if one of your funds suddenly starts trading in riskier assets, this might expose you to more overall risk than initially planned, and you should take action to carefully adjust your portfolio.
Investors following a long-term plan don't need to invest in bonds or the stock market manually – they can also choose to invest in funds that organize most of the day-to-day investing activity themselves. The quantitative hedge funds you can find in the CARL app are perfect as pre-packaged investment opportunities. As a part of your investment portfolio, they provide 15%+ targeted returns while using hedging strategies to minimize the risk you're exposed to.
Being hedge funds, these quants still do come with a certain amount of risk – so you might alternatively want to use them as a short-term investment opportunity to provide diversification to your portfolio. They can create short-term profits or even a relatively regular income that may tide you over until your long-term investments mature.
If you're an accredited investor, you can easily and quickly set up your CARL account to get immediate access to sophisticated quantitative hedge funds as well as the tools you need to invest in them. CARL is the power of quants at your fingertips and a perfect part of your long-term investment portfolio. Get access now and start investing in your long-term financial future.
With Denali and K2 we give you a choice of two different hedge fund strategies that focus on long-term stock investments. While Denali builds a portfolio of U.S. stocks with a market capitalization of more than $1 billion, K2 selects S&P 500 stocks that rise faster than the market and quickly sells those that fall.