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If you have saved up a large sum of money and its merely siting in a low yielding bank savings account, or in a CD, chances are you may want to see a higher return on your money. Good long term investments tend to carry some risk, , which carry little in the way of risk. For this article, we are going to look at long term investments that will help you save for college, retirement or to buy a new house. You need to first figure out how much risk you want to take. Some long term investments carry more risk than others but offer much higher yields on a successful investment. You also need to determine how long you are willing to have your money tied up into an investment. If you come to the conclusion you need access to your funds in the immediate future.
The five major classes of long term investments range from conservative” to “risky.” These include the following:
Equities or stocks:
Most volatile in the short term, these can yield a very high rate of return. Throughout history they have outperformed other investments however. With stocks, the returns and principle both fluctuate, so when you redeem a stock it may be worth more or less than the original cost. With stocks you buy low, sell high. Stocks can, but not always pay dividends, which is a payment made by a corporation to its shareholders. Most of these payments are done in cash format, but some companies will distribute stock dividends, whereby additional stock shares are distributed to shareholders. Cash dividends tend to be paid every quarter. Stocks can be a great invest due to the dividends added to the ability to sell the stock at any time. The risk with a stock is that the shares value can fall far below what you paid for the share. I should point out however that not every company pays a dividend, so due diligence is required on your part to learn the specifics of the company you are investing in. Currently dividend stocks out perform on average non-dividend stocks.
Bonds in January seemed as if they would be a bad year to invest in, but as February rolled around, it started to turn into the hot investment of the year. Worries of a bond bubble have disappeared, and now experts are saying to buy bonds. Bonds simply put are an IOU or a debt. You are serving as the bank when you invest into a bond. You are loaning your money to one of two entities either a private or public company or to the government. If you find the stock market to volatile, bonds make a good investment, as they are traditionally safer than stocks. When it comes to bonds, the government bonds are safer than bonds to private companies generally. For U.S Treasury Bonds, you can bid for these bonds directly through TreasuryDirect.gov (with no fees), but these bonds are available only in $1,000 increments. While bonds are generally safer than stocks, some bonds are down right dicey investments, especially true with bonds to private companies, while federal government bonds are a safe bet. The yield however can be much higher with bonds made to private companies. The term “Junk Bonds” comes from companies that are less less credit-worthy. Your more credit worthy private companies are are deemed investment-grade bonds. U.S Government bonds are risk free but will pay a lower yield then a bond issued by an investment grade company like Campbells soup (investment grade). But Campbells soup will pay less than a bond issued by say for example “Creeper Maks Acme Widgets”. The longer your bond the higher the yield will be. You get paid more to keep your money tied up longer. Bonds however are directly tied to Interest rates. If interest rates rise, than bond prices will fall, because existing bonds with lower interest rates are less valuable. The time to buy bonds is when interest rates are at high levels. None of the price fluctuations matter however, if you plan to keep the bond to maturity. Price fluctuations of bonds only matter if you plan or need to sell the bond on the secondary market, as when you buy a bond, your interest rate was set when you bought it, so if you let a bond reach maturity before cashing it out, you will receive the full face value of the bond, unless the company that issued it folds.
Another type of bond which risk wise falls between a corporate bond and a U.S treasury bond is whats known as an Agency bond. While these are not as safe as a U.S Treasury bond, they are however issues by government sponsored enterprises, which are regulated in part by the government. The government regulation makes them perceived as safer than regular corporate bonds. Agency Bonds can be a good middle ground from lower yielding treasury bonds but higher risk corporate bonds, and a good way to diversify your investment portfolio.