Long term investment is the buying of several types of assets with the intention of holding them for more than a period of one year.
Long-term investing is the purchasing of assets with the intention of holding them for a substantial time. The real definition though is not in when an asset is sold, but in the outlook and strategy of the investor. Assets are selected with an expectation of producing a desired level of return, or to hedge other assets. The return on a long-term investment has more to do with the underlying value of the asset than with short-term market activities.
What is meant by Long Term Investment?
Many long-term investors believe they need more knowledge and deeper understanding than short-term traders and speculators. They must understand the assets themselves and how historical and economic forces develop. A long-term portfolio is assembled, usually consisting of several assets from one or more asset classes. Since the future is inherently uncertain, diversification is used to produce acceptable returns under a variety of future conditions. Individual assets will perform differently, and return is partially dependent on larger economic conditions. Some assets are included as hedges against certain kinds of risks – from a change in interest rates, for example, or in a currency exchange. Such changes can have a predictable effect on an asset; other assets can be included which will be affected oppositely.
The wide variety of assets available to the long-term investor is primarily found in one of three asset classes: stocks, bonds, and real estate.
Stocks represent an ownership stake in a company. A stock’s true value is a function of the intrinsic worth of the company. Estimating a company’s intrinsic worth supports evaluation of a stock’s price as either over- or under-valued. There are extrinsic factors as well – good or bad news, rumors, market forces, trading trends. The long-term investor sees these as short-term noise mixing with the signal of long term appreciation or decline in a company’s actual worth.
Bonds make up the second asset class. Bonds are debt obligations, generally either corporate or government. For the most part, investment grade bonds will never produce a return below a certain minimum, while stocks which can lose nearly all of their value. The long-term effective rate of return on a bond depends on the terms of the bond itself, but also on the prevailing interest rates and, especially in the case of bonds issued by governmental entities, on their tax status and the tax situation of the investor.
Real estate comprises the third asset class. Assets in all three classes can generate revenue streams while they are held – real estate through rental income, stocks through dividends and bonds through coupons. Unlike other asset classes though, real estate usually requires ongoing maintenance and management expenses. Generally, real estate is held for considerable periods of time, sometimes for generations.
The meaning of long-term investment is, most fundamentally, the creation of a relationship between the investor and the underlying reality of the world. Long-term investors tie themselves through equities to the long-term health and viability of a corporation, through bonds to projects of capital improvement and infrastructure initiatives, and through real estate to the long-term possibilities and prosperity of a property and its surrounding area. In contrast to the fast-paced and value-neutral world of speculation, long-term investment is a vote of confidence in the real people and real endeavors which fuel the economic well-being of our nation and, indeed, of the world.
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