Best long term investments: the top 10

What is the best long-term investment?

When thinking about long term investing, it’s usually best to select investments based on understanding, time horizon, and risk tolerance. However, there are a number of investments that provide universal appeal as they’re simple to understand, have good returns, and have proven themselves through market fluctuations. The investments listed here are for time horizons of 5 years or more.

S&P 500 funds (U.S.)

The S&P 500 index tracks the stocks of 500 large-cap companies listed on U.S. stock exchanges. It includes many of the largest companies in the United States, and thus it has exposure to a variety of worldwide market challenges and opportunities.

Historically, it has generated an average annual return over the past 25 years of 9.5%, while offering an average dividend yield of 2%. While less than ideal as a short-term investment, continually investing in funds that follow the S&P 500 over years is a good way to grow wealth in a fairly low-risk fashion, especially with dividends reinvested.

Russell 2000 funds (U.S.)

The Russell 3000 index attempts to represent the entire U.S. stock market, and within it, the Russell 2000 tracks the smallest companies in the index. Small-cap companies can have greater risk than large-cap ones, but the Russell 2000 offers more diversification as well, being less weighted towards the tech sector and having more exposure to most other sectors, including financials, healthcare, industrials, and consumer staples.

Its average annual return from 1993 to 2018 was about 9%, not including dividends, which tend to be less than large company indexes. However, a continual investment strategy, like with the S&P 500, could be a profitable option.

Corporate bonds (U.S., Europe)

Oftentimes, high-yield corporate bonds can be risky to invest in because they can have low credit ratings and high investment minimums, sometimes between around 700£ and 3.500£. Various exchange-traded funds (ETF), however, can offer exposure to U.S. and European corporate bonds without the need for company selection and with a greater degree of diversification. These bond funds can be filtered by company sector and region, bond maturity dates and creditworthiness, among others, and prospective yields vary according to risk levels.

Precious metals (Americas, Europe)

Precious metals have been popular investments for decades, and it’s no wonder why. According to Statista, from 1971-2019 gold returned 10.61% annually, only slightly less than U.S. stocks on average. But gold isn’t the only precious metal worth considering.

2020 saw shortages of palladium, platinum, rhodium, and an increase in demand for silver in 2021, which should only continue in the coming years. Large companies like Rio Tinto can give investors exposure to many different precious metals, while many ETFs concentrate on one or more precious metals.

Other physical commodities (Americas, Europe)

In the wake of the Coronavirus Pandemic, U.S. stocks have rebounded nearly 35% from their pandemic lows in 2021. Commodities worldwide, on the other hand, have risen a staggering 44.9% in the same period, in part due to rises in demand coupled with supply-chain difficulties. Of particular note have been excellent returns on bulk shipping and petroleum.

Municipal bonds (U.S.)

U.S. municipal bonds are issued by regional and local government bodies, and serve as debt instruments for these governments to raise money for public works projects. Returns can vary: historically, these bonds can yield anything from 0.1% to 15% annually, while funds will usually advertise 3-7% annual returns.

They tend to be lower risk, though rising interest rates can make bonds with lesser rates decline in value before the maturity date. Defaults, though rare, can still occur (as with Detroit in 2013), so investors should still exercise some caution.

Emerging markets (Americas, Asia, non-China)

Uncertainty concerning China, the world’s second largest economy, should not deter investors from investing in strategic sectors of large emerging markets like Asia and Brazil. Investing in individual emerging market stocks can be quite risky, but some funds provide entry into diversified portfolios of companies that aren’t trading at valuations as high as U.S. or European stocks.

iShares EMXC, for example, has returned nearly 40% since its inception 4 years ago, with an average dividend yield of 1.7% historically, and has no exposure to China. With interest rates set to increase only modestly in the next year, equities valuations in primary capital markets will likely remain high, tempting bargain hunters to explore major emerging markets.

Residential real estate (U.S., Europe)

Despite residential real estate values being at all-time highs on both sides of the Atlantic, there are a number of lucrative ways to take advantage of residential markets. Publicly traded real estate investment trusts (REITs) with leased residential portfolios are excellent alternatives to outright property investment, and provide much needed diversification.

Different types include single-family, multi-family, apartment/condominium, and senior housing. REITs usually specialize in one or two of these types, and dividend yields are usually around 5% to 9% annually. It’s especially important to take notice of payout ratios and degrees of leverage for these investments: if either is too high, it can mean the portfolio cannot handle rising vacancies or economic downturns, which may result in share dilution from the issuance of more shares or liquidating parts of the portfolio in unfavourable conditions.

Emerging markets (Africa)

African emerging markets deserve a section all to themselves as they’re not on many investors’ horizons. It’s easy to dismiss investing in Africa as being too risky, with too much political instability and fallout from the Coronavirus Pandemic, but with long enough time horizons and an accurate appraisal of the significant growth in the last decade of sub-Saharan African markets in countries like Kenya, Mozambique, and Tanzania, the opportunities become difficult to ignore.

Even with economic stagnation as a result of the Pandemic, annual GDP growth in these countries of 5% to 7% previously signals the potential for very good returns for the patient investor. The key to investing in funds specializing in African companies is to find ones with experienced managers that stay apprised of all aspects of country and regional progress where the companies conduct operations.

Nordic markets (Europe)

European equities as a whole are projected to outperform other markets throughout the rest of 2021 and into 2022, but this doesn’t mean that all European equity markets are created equal. The Nordic markets, in particular, have proven quite resilient in the wake of the Coronavirus Pandemic and their countries’ GDP growth projections are strong for 2022. The iShares Sweden MSCI ETF, which never broke $39.00/share USD in the 18 years before the Pandemic is now only slightly down from nearly $50.00/share USD at the writing of this article while still sporting over a 3% annual dividend. Furthermore, from 1965-2014, Nordic markets outperformed both U.S. and broader European markets, with average annualized returns reaching 8.5%.