Long-term investments: how to build a winning portfolio (2024)

Taking a long-term view and why it matters

For many people, investing might not be a top priority right now. The markets have been volatile with extreme moves to the downside as well as the upside. There are also more urgent things to worry about. The Covid-19 pandemic is causing unprecedented economic and personal damage to communities around the world.

The geopolitical environment is as challenging as it has been since the Cold War. According to Ian Bremmer, a political scientist and founder of the Eurasia Group, we live in a G-Zero world. Withdrawal of Western democracies from leadership on global issues has created a vacuum in international politics. As countries focus inwards, global issues like climate change or WHO funding to prevent the next pandemic, are increasingly ignored.

China and the US are in the middle of a technological and ideological war. Europe faces its own set of problems. Brexit uncertainty lingers as the UK and the EU have only seven months left to work out a new free trade agreement. Politically, the EU remains divided on structural issues like the issuance of joint EU debt and fiscal austerity. The chasm between the rich Northern European countries and their relatively weaker Southern neighbours grows wider.

In this uncertain environment, how should investors think about their long-term investment options?

Long-term investing, however, is inherently about the future and not the present. Timing the market has historically been a bad idea. It can also lead to poor long-term performance outcomes. For example, between 1974 and 2015, missing the best return day each year reduced annual return from 11.0 per cent per year to 5.5 per cent per year.

Following a long-term investment strategy allows investors to remove emotions from the equation. Research shows that from 1872 to 2018, the chance of a negative return for any given year is about 31 per cent. As the holding period increases to five years and 10 years, the frequency of negative returns decreases. Over 20 years, investing in the S&P 500 always generated a positive return.

Long-term investors also benefit from the power of compounding. Compounding is the ability to earn a return on principal and accumulated interest. Albert Einstein famously referred to compounding as the eighth wonder of the world. As an example, earning 3 per cent simple interest per year allows an investor to double their investment in 33 years. However, if interest were compounding annually, the same investment would double in 23 years instead.

Despite market turbulence and economic uncertainty, investors can still build a stable long-term portfolio. So, what are good long term investments in the current environment?

What assets can be safe long-term investments?

There are many types of long term investments. Risky investments typically generate the best long-term returns as investors get compensated for the risk they take. Safe long-term investments carry less risk and have stable, predictable patterns or performance. It is often the balance of risk and return that investors should ponder before building a portfolio.

In the given environment, we focus on the more defensive long-term investment strategies below.

Savings accounts and certificates of deposit

Interest rates are meagre around the world but so is inflation. However, just holding cash is deflationary as its value erodes every year. A high yielding savings account or a CD could give investors a positive real interest rate (nominal interest rate minus inflation). Deposits and CDs often fall under a government deposit insurance scheme and are the best safe long-term investments.

Government and corporate debt

Government and corporate debt are both long-term investments examples. Assuming investors hold bonds to maturity, losing money on government debt is unlikely because governments can always print money or issue more debt. On the other hand, corporate debt can result in defaults and credit losses. Investors can reduce the likelihood of that happening by investing in high quality, or investment grade, bonds. Using exchange traded funds (ETFs) to diversify investment exposure will further limit the probability and impact of defaults. While bond prices can fluctuate, a portfolio of bonds should remain relatively stable.

For investors willing to take more risk, emerging market bonds and high yield corporate debt could be suitable options.

Real estate

Owning a property is a prototypical long-term investment. Residential property values are set to benefit from low interest rates and property owners can take advantage of numerous tax incentives. Investors can also access non-residential investment opportunities through crowdfunding platforms or REITs.

Some areas of real estate might be best to avoid. For instance, retail malls have been on the decline due to e-commerce. Covid-19 is further accelerating this trend. On the opposite end is industrial real estate. E-commerce requires warehouses and storage facilities. Working from home is driving increased demand for cloud infrastructure and data storage facilities. Data centre REITs, like Equinix (EQIX) or CyrusOne (CONE), can be a smart long-term investment to consider.

Peer-to-peer lending

Peer-to-peer (P2P) lending is a relatively new asset class, designed to facilitate loans to consumers and small businesses outside of the traditional financial system. These loans are relatively low-risk long-term investments. Even in a pandemic, a diversified portfolio of collateralised consumer loans could be a good bet.

Some P2P platforms allow investors to allocate money to different tranches of loans, depending on the credit risk. Investors can often access the lending book of a P2P platform, getting a list of all the individual loans issued by the platform and some information about the borrowers. P2P lending can yield anywhere between 3 per cent and 20 per cent, depending on the risk and maturity of the loans.

Stocks and ETFs

Despite their volatility, stocks remain one of the best long-term investments. Between 1928 and 2015, the returned an average of 9.5 per cent per year. Emerging markets, for example, have historically returned 12-13 per cent per year, albeit with significant short-term fluctuations.

Downturns and economic recessions often present some of the best long-term investment opportunities. To quote Warren Buffet, investors should "be fearful when others are greedy and greedy when others are fearful".

For more risk-averse investors, defensive sectors like consumer staples, utilities and large-cap technology might be more safe long-term investments. Companies like Walmart (WMT), and IBM (IBM) have stable cash flows, strong balance sheets and are resistant to a recession.

Since the financial crisis, large-cap technology stocks have been one of the top long-term investments. In the Covid-19 world, video games, like Activision Blizzard (ATVI) and Take-Two Interactive (TTWO), and on-demand entertainment, like Netflix (NFLX), have benefitted. Similarly, online collaboration tools, namely Zoom (ZM) and Slack (WORK), cloud computing names and cybersecurity stocks, have all gained from the move to work from home.

ETFs are a useful tool for investors to diversify their portfolio and get exposure to the broad market. Using ETFs to build a core portfolio is a commonly used investment strategy.

Long term investments 2020: building a winning portfolio during a pandemic

Building a winning portfolio requires an understanding of risk tolerance and investment horizon. Over the long-term, riskier investments tend to deliver higher rates of return. However, for investors with a time horizon of less than three years, short-term volatility could be an issue.

Another rule of thumb in investing is diversification. Spreading risk across a multitude of uncorrelated asset classes should create a less volatile and more defensive portfolio. ETFs are a useful investment tool for diversification. Active ETFs, however, have a poor track record and charge high fees. The main goal of using ETFs should be to get cheap beta exposure to the market.

Lastly, limiting the impact of emotions on investment decisions is vital. We, as humans, have a lot of behavioural biases, like loss aversion, herding and overconfidence bias, that lead to adverse investment outcomes. Investors should reassess their portfolios in times of market stress, but more often than not, the secret lies in doing nothing. Learn more about trading psychology and how to avoid biases in your trading with our comprehensive online guides.

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