Reviewed by Aug 26, 2020| Updated on
Long-term refers to the extended duration an asset is held by an investor. Depending on the investor’s requirements, long-term investment can range from as short as 12 months to as long as 30 years. For most investors, the holding period for long-term assets ranges from at least 5 to 10 years. However, there is no predefined holding period for long-term assets.
Understanding Long Term
Long-term investments can be defined as those assets that an individual or entity holds from more than 12 months. They can either be bonds, shares, monetary instruments or real estate. Unlike the short-term investments where the assets are most likely to be sold in a short span of time, long-term investments will not be sold for many years. In some cases, investors may also choose to never sell them.
How Does Long-Term Investments Work?
Investors generally opt for long term investments when they find themselves with excess capital that they can afford to keep invested for a long period. Also, investing in long-term assets require a lot of patience as the holding period could extend even for decades.
However, long term assets have the potential to generate excellent returns due to the power of compounding. The longer an investor remains invested in an asset, the higher returns the asset will be able to generate.
Saving and investing in retirement schemes is also considered a long-term investment. Retirement planning has been one of the key reasons behind most individuals having an investment portfolio.
If started early, individuals would have enough time until retirement to amass a significant corpus before retirement. This is due to the power of compounding. Also, investors can afford to accept the prudent risks associated with the investments when held for an extended period of time.
Market fluctuations and other market-related risks, such as inflation and downturns, are pretty much balanced out in the long run with rupee-cost averaging. This will allow investors to generate an overall higher return in the end.