Long-Term Investing: Benefits, Types, and Strategies for Canadian Investors

Long-term investing is a strategy that involves buying and holding assets for an extended period of time, typically more than 10 years. This approach allows investors to benefit from compounding returns, reduce transaction costs, and avoid short-term market volatility. In this blog, we will discuss the benefits of long-term investing, different types of long-term investments, and some strategies for building a successful long-term investment portfolio for Canadian investors.

Benefits of Long-Term Investing Long-term investing offers many benefits to investors, including the following:

1. Compounding Returns: Long-term investors can take advantage of compounding returns. Compounding is the process of earning interest on your principal investment and then earning interest on the interest earned. Over time, compounding can help your investment grow significantly, especially if you reinvest your earnings.
2. Reduced Transaction Costs: Long-term investing reduces transaction costs. Frequent buying and selling of assets can result in significant fees and commissions that eat into your investment returns. By holding assets for the long term, you can reduce transaction costs and increase your investment returns.
3. Avoiding Short-Term Market Volatility: Long-term investing allows investors to avoid short-term market volatility. By focusing on the long-term, investors can ignore the day-to-day fluctuations in the market and make investment decisions based on long-term trends and fundamentals.

Types of Long-Term Investments

There are several types of long-term investments available to Canadian investors. Here are a few examples:

1. Real Estate: Investing in real estate can be a great long-term investment strategy. You can purchase rental properties, invest in real estate investment trusts (REITs), or even purchase shares in real estate crowdfunding platforms.
2. Exchange-Traded Funds (ETFs): ETFs are a type of investment fund that trades on stock exchanges like a stock. ETFs can provide exposure to a variety of different asset classes, including stocks, bonds, and commodities.
3. Dividend-Paying Stocks: Dividend-paying stocks are stocks that pay out a portion of their earnings to shareholders in the form of dividends. These stocks can provide a steady stream of income and can be a great long-term investment.
4. Mutual Funds: Mutual funds are professionally managed investment portfolios that pool money from many investors to purchase a diversified mix of stocks, bonds, and other securities.
5. Annuities: An annuity is a contract between an individual and an insurance company where the individual makes a lump-sum payment or a series of payments, and in exchange, the insurance company guarantees a stream of income for a set period of time or for the individual’s lifetime.
6. Bonds: Bonds are a type of fixed-income investment that can provide a steady stream of income. When you purchase a bond, you are essentially loaning money to a company or government entity, and in exchange, you receive interest payments over a set period of time.
7. Gold and Other Precious Metals: Gold and other precious metals have been considered long-term investments for centuries. Investing in physical gold or purchasing shares in gold exchange-traded funds (ETFs) can provide diversification to your portfolio and act as a hedge against inflation.
8. Private Equity: Private equity involves investing in privately held companies that are not publicly traded on stock exchanges. Private equity investments are typically made by high-net-worth individuals or institutional investors and can offer the potential for high returns, but also come with higher risks.
9. Impact Investing: Impact investing involves investing in companies or organizations that are committed to making a positive social or environmental impact in addition to generating financial returns. This type of investment can be a great way to align your investment portfolio with your personal values.
10. Alternative Investments: Alternative investments can include anything from art to wine to cryptocurrencies. These types of investments can provide diversification to your portfolio but often come with higher risks and may not be suitable for all investors.

1. Start Early:

The power of compounding returns is one of the greatest advantages of long-term investing, and it’s why starting to invest as early as possible can make a significant difference in your investment outcomes.

Compounding returns refers to the process of earning returns on your investment, and then reinvesting those returns to earn even more returns in the future. Over time, this can create a snowball effect, where the growth of your investment accelerates as the returns compound.

Starting to invest early gives you more time for your investments to benefit from compounding returns. For example, if you start investing at age 25 and invest regularly for 40 years, your investments will have 40 years to grow and compound returns. On the other hand, if you wait until age 45 to start investing, you’ll only have 20 years for your investments to grow and compound returns.

Even small amounts invested regularly over a long period of time can add up to significant returns. For example, if you were to invest $100 per month into a retirement account that earns an average annual return of 8%, after 30 years, you would have invested a total of $36,000, but your account balance would be over $100,000. This is due to the power of compounding returns.

Of course, the amount of returns you earn on your investments will depend on the investment strategy you choose and the level of risk you are willing to take on. However, the key takeaway is that the earlier you start investing, the more time you have to benefit from compounding returns, even if you are only able to invest small amounts.

In summary, starting to invest early and consistently is a powerful way to take advantage of the benefits of compounding returns, and even small investments over a long period of time can add up to significant returns. So, if you haven’t started investing yet, consider doing so as soon as possible to maximize your investment outcomes.

2. Diversify:

Diversification is key to reducing risk in your portfolio. By investing in a mix of assets, you can spread your risk and avoid the impact of any one asset on your overall portfolio. There are different ways to diversify your portfolio, including:

• Investing in different asset classes: such as stocks, bonds, and real estate
• Investing in different industries: such as healthcare, technology, and finance
• Investing in different geographies: such as Canada, the US, Europe, and Asia

When you diversify your portfolio, it’s important to keep your investment goals and risk tolerance in mind. A financial advisor can help you create a diversified portfolio that aligns with your goals and risk tolerance.

For more information on the importance of Diversification, you may refer to : https://www.investopedia.com/investing/importance-diversification/

3. Stay Disciplined:

Staying disciplined when it comes to long-term investing requires a combination of mental preparation and strategic planning. Here are some ways to help you stay on track:

1. Set clear investment goals: Before you start investing, it’s important to have a clear understanding of your investment goals. These goals should be realistic, achievable, and measurable, and they should align with your overall financial plan. By setting clear investment goals, you can avoid the temptation to make impulsive decisions based on short-term market fluctuations.
2. Develop a long-term investment plan: Once you have your investment goals in place, it’s important to develop a long-term investment plan. This plan should outline your investment strategy, including your asset allocation, diversification, and risk tolerance. Stick to your plan, even during market downturns or periods of volatility, and avoid making knee-jerk reactions that could derail your long-term goals.
3. Monitor your investments regularly: While it’s important to avoid reacting to short-term market fluctuations, it’s still a good idea to monitor your investments regularly. This can help you identify any potential issues or changes that may require adjustments to your investment plan. However, avoid obsessing over day-to-day market movements or making sudden changes based on short-term fluctuations.
4. Automate your investments: One way to stay disciplined with your long-term investing is to automate your investments. Set up automatic contributions to your investment accounts to consistently add to your portfolio, regardless of market conditions. This can help you avoid the temptation to stop investing during periods of volatility or market downturns.
5. Stay educated and seek professional advice: Finally, it’s important to stay educated about investing and seek professional advice when needed. Keep up with industry news and trends, and consider working with a financial advisor who can help you navigate the complexities of long-term investing. By staying informed and seeking guidance when necessary, you can stay disciplined and achieve your long-term investment goals.

4. Rebalance:

As you continue to invest over the long term, your portfolio will naturally grow and change in value and composition. Some investments may perform better than others, leading to changes in the percentage of each asset class within your portfolio. This can lead to an imbalance in your portfolio that may not align with your long-term investment goals, potentially increasing risk or lowering potential returns.

Rebalancing is the process of adjusting your portfolio back to your original target asset allocation. By doing so, you ensure that your portfolio remains aligned with your long-term investment goals and risk tolerance. This typically involves selling some of your outperforming assets and buying more of your underperforming assets.

Rebalancing can be done on a regular schedule, such as annually or semi-annually, or when your portfolio drifts too far from your target allocation. A good rule of thumb is to rebalance if any asset class in your portfolio deviates more than 5% from your target allocation.

By rebalancing your portfolio, you can help manage risk and potentially improve long-term returns. It helps to ensure that you are not overexposed to any one asset class or investment, and it helps to maintain a level of diversification in your portfolio. It’s important to note that rebalancing should not be done too frequently, as this can lead to unnecessary transaction fees and taxes.

Overall, rebalancing is an important aspect of long-term investing that helps ensure that your portfolio remains aligned with your goals, and it can be done with the help of a financial advisor or through online investment platforms.

5. Consider Tax-Efficient Investing:

Taxes can eat into your investment returns, so it’s important to consider tax-efficient investing strategies. Some tax-efficient investment strategies include:

• Using registered accounts: such as RRSPs, TFSAs, and RESPs to take advantage of tax-deferred or tax-free growth
• Investing in tax-efficient funds: such as index funds, which typically have lower turnover and therefore generate fewer taxable capital gains
• Tax-loss harvesting: selling losing investments to offset capital gains

A financial advisor can help you implement tax-efficient investment strategies that align with your goals and risk tolerance.

6. Stay Disciplined and Patient:

Long-term investing requires discipline and patience. It’s important to stick to your investment plan and resist the urge to make emotional investment decisions based on short-term market fluctuations. Market volatility is a normal part of investing, and it’s important to have a long-term perspective. Historically, the stock market has delivered positive returns over the long term, despite short-term ups and downs.

Final Thoughts

Investing for the long term can be a smart way to grow your wealth and achieve your financial goals. By following these tips, you can create a long-term investment strategy that aligns with your goals and risk tolerance. Remember, investing is a journey, not a destination, so it’s important to stay disciplined and patient along the way.