Best long term investment strategy

What is a long term investment?

A reporter asked an investment banker, which time horizon, they use, short term, middle term or long term.
The banker answered: “Well, I think we also use the long term.”
The reporter was good and so he asked again: “What do you mean with long term?””Well, I the morning we take into account the releases of the afternoon.”

In this article about the best long term investment strategy we focus on the years.

First of all:
Understand the power of time and interest

Before you consider any good long term investment strategy you should be aware of the power of time and interest.
The power of time you can image at the picture of the tree. It lasts years until you have a big and strong tree and you can´t force it. It is useless to pull boughs and branches. But one day – out of nothing – he will start to deliver plenty of fruits every year over and over again. The same is true for investment.

Let´s assume, you will want to promote your child. It is just born and you think, that it should have a considerable amount of money in 20 years.
For this purpose you decide to spend one time, for example, at the day of his birth, 1,000 US$.
We assume, that we have the last 20 years an average interest rate of 5%

After 20 years your account is: 2,653.30 US$

The amount has more than doubled, or in other words:
It increased by the factor 2.653!

Is this realistic?

As always: It depends.
It depends on what you look.

Nominal interest rates:

Nominal interest ratesThe nominal interest rates for 10 year treasuries bonds have been in this range. Sometimes they were a lot higher than 5%. As you can see the interest rates for the 10 year Treasuries were in the early eighties, even double digit as well as the one year treasuries.
From this picture you can see, that the interest rate differs widely over the years and that the 10 year interest rate is more stable than the one year treasure note. Because in the article we focus on the long term investment, we look at the 10 year interest rates.
But when you make long term decisions, you have to take into account the inflation.

Inflation is the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling.

Your goal is the keep the purchasing power of your money, because you want to buy more things in the future than today.
So take a look at the inflation and the real interest rates.

Real interest rates

Real_interest_rates_on_ten_year_treasury

As you can see the real interest rates (blue line) look different. The inflation, here measured as the Consumer Price Index (CPI), differs a lot over time. It goes from double digit positive to double digit negative numbers. But in the last years the interest rate and the inflation become more stable. On the other hand, you can see also that the interest rates nominal and real drop in the last years.
This means to you, that it becomes more difficult to achieve high real interest rates. But you have still the possibility to gain  a good profit on your investment. Centenly you have to consider other investment than treasury bonds.

I offer you a small excel sheet, where you can calculate the effect of interest and inflation. Interest calculation


Kinds of long term investments

Investments can be made in a variety of assets. Normally we think of things but we can also invest in persons.

Investment in persons

Which one would be the best?
Of course: You!

Invest in yourself! You are your most valuable asset with the highest return.

Invest in education and look what education has the highest payoff.
Normally we assume that college is a good education. As always it depends what you expect. If you expect a high income, then you are wrong. Because if it would be true, than the professor should have the highes income. But this it not true.
If you look around the richest people in the world, like Bill Gates, they didn´t finish the university. The question remains, what they did instead. Most of them invested in themselves. They hired consultants and coaches. They learned from the best. Do the same. For example, one of the best coaches is Anthony Robbins.
Learn what drives you to success. Do you have an aim what you want to reach or do you have a situation, which you want to avoid or escape. Both ways work. Check out, what fits to you.

Investment in things

Now we discuss the investments, which you expected, investment in things:

  • Cash
  • Treasuries USA
  • Treasuries outside USA
  • Stocks, blue chips
  • Stocks, growth
  • real estate
  • gold, silver

New possibilities:

  • lending platform
  • venture capital (kickstarter)

Cash

Cash is the best in the short term and the worst in the long term because you don´t get any revenue from holding it.
May be, that the future may prove something new. In the case, that the interest rate drop below zero. Then you will get more with your cash in future. The money in the bank will drop because the interest rate is negative.

2 things more to cash

  1. If you have cash in your hand, you can always pay. Everyone wants cash.
  2. If you have cash in your hand you have a claim against the federal reserve bank.
    If you have cash on your bank you have a claim against the bank! Think about it.

Treasusies USA

The treasuries give you a small interest rate. The risk that the government will not pay is still very low even the total debt is already very high.
See also above.

Treasuries outside USA

Treasuries outside the USA can be emitted in US Dollar or another currency.

Treasuries in US$

Treasuries in US$ do not have any currency risk. If you live in the US and you buy this treasury, then you don´t have to worry about any currency risk. The debtor will pay back your money.
But you have to worry about the creditworthiness of the debtor. You have to think about, whether the debtor will have enough money, especially US Dollars, to pay back the loan. Look for example to Argentinia. They have a lot of trouble at the moment.

Treasuries in another currency

Now you have the currency risk, but every risk is also a chance. Maybe that the US Dollar devalueate and then you will get more US Dollars back. Keep in mind that the currency change may be bigger than the interest rate. In other words: The interest is 5% but the exchange rate drops more than 5%. In this case you will lose money.
Sometimes I can be smart to buy a treasury in another currency because the currency will be more worth in the future. Later you sell the treasury and get back your money, the interest and the currency earnings.

Stocks, blue chips

In the long run you can expect good returns with blue chips. (approximately 8%). You can see this in the Dow Jones Index. It increased in value over the last hundert years. But there is a bias. Because the blue chips from the 20 of the last century are different companies than today, they change the combination of the Index. If you want to trade the same, you have also to sell the mature companies and buy the young. Nowadays you can buy the basket and buy only an exchange trade fund (etf). This is very smart and cheap.
But even in this case you have to get a good entry point. Because sometime the index will drop and it can last years until it recovers and reaches the entry price.

Stocks, growth

Companies which grow, deliever an excellent revenue. On the other hand, there is a good chance that they may fail. For example, Apple. In the eighties they develop a good computer, but then they struggled and nearly died. Steve Jobs reentered the company and they developed the iPod. They weren´t the first, but they sold it extremely well. And then they did the next thing. Question: Do you think, that they will continue their success? If yes, then buy the stock.

The tricky thing with growth stocks is to recognize the niche, the country, the sector, the demand for their product, the skill of the management and so on. Once you have a good candidate, than don´t hesitate, instead buy.

Real estate

Real estate can be a gem. Most rich people are rich because of real estate. But don´t underestimate the skill. You have to know what you do. It is a profession, but it can be very rewarding. The best thing about real estate is, that you will get a lot of cash flow if you do it right. The real estate market is very broad: Real estate for companies, for living, foreclosures, new buildings, garages, land, wood, other countries, reits,….

Gold and silver

Gold and silver are precious metals. They do not deliver any interest instead it cost you money to keep them safe! But it is a good insurance for bad times. On the other hand, because they are so precious, especially in bad times, the government can forbid it. In the United States gold was forbidden from 1933 until the end of 1974.

 

New possibilities: Lending platform

The internet has developed new possibilities. In former time the banks collect money from savers and lend the money to borrower or investors. The internet offers marketplaces where you can put your money and then invest it to many borrowers. This is already possible for very little money, sometimes you can start with little as 100 US$. This amount can be split over 10 investments. Therefore you reduce the risk that one borrower can pay the loan.

In the internet, you can find a lot of such lending platform. Some attract private borrowers, other attract companies. Some are only available in the US, some are only available in Europe and some collect money in the rich countries and search for borrowers in least developed countries and hope to increase growth in these countries.

The Lending Club is a big player in the US. On average you can expect 6% – 7% return per year including the defaulted loans. This is far more than with treasuries.

 

New possibilities: Venture capital

If you like more risk and hopefully more return you can invest in Venture Capital.
In the United States this seems to be synonymous with Kickstarter. There you can invest your money in nearly all the stuff you can image and sometimes even more.
But there are more opportunities to invest your money. For example

  • FundRazr
  • RocketHub
  • Indiegogo

Thelast one, for example, offers projects all over the world. On the other hand Kickstarter has offered his service in the UK since October 2012.

The project that you can finance have different intentions. Some want to sell their stuff before they start to produce it. Other offer subordinated debt loans and a few offer a real partnership.


Conclusion

There are a lot of different ways to invest the money. This survey covers the main possibilities and hopefully widens your view.
There is no best long term investment. The best thing is to do some investment. Do it in an area, where you feel comfortable with.
Eventually one investment will fail, most of them will do mediocre and hopefully one or two will do extraordinary good. This will improve your overall return.


Further Reading

If you want to dive deeper into this topic, I highly recommend the book
“Safe Strategies for Financial Freedom” by Van Tharp.

I read it a long time ago – as an investment in people (me!) – and I gave me a lot new insights.

Maybe, you don´t get it, because it´s already from 2004. In this case I can recommend the other books by Van Tharp. They all are very well written and serve better content.

 

2 thoughts on “Best long term investment strategy

  • 11. March 2016 at 18:41
    Permalink

    Dear Bernd,
    This is excellent information. Especially the part about investing in yourself for the greatest return. I have never thought of myself personally as an investment but clearly you know of what you speak because luckily in my case I have proven your theory. Only wish I had invested more, earlier on.
    Regards,
    Connie

    Reply
    • 14. March 2016 at 10:47
      Permalink

      Dear Connie,
      thanks a lot for your pleasant comment.
      It makes me proud that you recognized a deep understanding in investing and to transfer it into your personal life.
      Kind regards
      Bernd

      Reply

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