Long Term Investment - Better Opportunities for 2021?

Are you thinking about retirement? Or a new home? If so, you'll need a long-term investment strategy and this article is designed for you.

Long-term investing is giving up some of your resources in the present, for more than one year, to earn a return in the future. 

Characteristics of Long Term Investment

The above definition implies some of the main characteristics of long-term investment.

Time horizon

It can be defined as the time during which a certain investment will be maintained.

The definition of long-term investment considers that the time horizon should be longer than one year, although it is common to think of longer time horizons when considering a long-term investment.

How are these horizons delineated? That should be your starting point. In exchange for what are you willing to give up the enjoyment of your money today?

Usually, the answer lies in the goal:

- Buying a home

- Retirement

- Children's education

Alternative, the 50/30/20 rule 

If what you are looking for is a quick way to calculate how much you can invest each month without affecting your lifestyle, you can use the 50/30/20 rule.

According to this rule:

- 50% of your net monthly income should go to cover your primary needs.

- 30% will go to expenses of personal choice or whim

- The remaining 20% will be used to achieve your financial goals, i.e. saving and investing.

Therefore, the quickest way to calculate how much you can contribute monthly is 20% of your net salary.

Required Return

After knowing the final goal, the initial disposition, the contributions, and what is the objective of your long-term investment, the required profitability to reach your goal can be calculated.

The following table shows an example of how the required return on investment varies by changing basic investment parameters, such as a long-term investment calculator.

✦ Initially, the goal of saving for retirement is considered as early as age 28. We assume that no additional initial capital is available and that monthly contribution will be $100 per month. 

✦ In addition, retirement is assumed to occur exactly at age 68, a time horizon of 40 years. 

✦ The financial goal will be to achieve an additional monthly income of $1,000 until age 90. Thus, the capital required at retirement to achieve the goal will be $264,000. 

Subsequently, different scenarios were evaluated:

- Normal stage (1)

- Doubling the monthly contribution (2)

- Add initial capital (3)

- Reduce the time horizon too (4)

- Double the additional monthly income at retirement (5)

Differences from other Types of Investments

It is interesting to differentiate between short, medium, and long-term investments. If you are looking for a high return in the short term, you are probably looking for very high risk and high volatility stocks. In these cases, stocks that have recently fallen sharply could be interesting.

In the long, term, greater diversification of assets will be sought since the objective is to achieve a certain return with the least amount of risk.