The benefits of a long-term investment strategy
Updated
October 30, 2024
A long term investment strategy takes some patience, but it can be one of the best ways to invest.
Like a fine wine or whisky left to mature, when it comes to investing, a long-term investment strategy could be one of the best options to help you achieve your goals.
That’s because when it comes to growing the value of your investments, time is the key ingredient. Time allows you to worry less about short-term stock market movements and focus on the longer-term appreciation stock markets have generally offered investors.
There’s no ‘get rich quick scheme’ with stocks. By knowing this in advance you can craft a portfolio that’s built to withstand the test of time, across market ups and downs.
Starting with a solid foundation doesn’t guarantee investing success. But, it should give you a better chance of building wealth.
The term gets thrown around a lot, but what exactly is a long-term investment?
As a rule of thumb, you should be willing to hold any investment for at least five years.
In an age of TikTok-length attention spans and same-day deliveries, this may feel like a lifetime. When you invest you try to think in decades if you can.
Depending on what you are investing for, your definition of ‘long’ will likely be different to someone else’s. Ideally, it’s great if you can stretch your investing timeline as far as possible.
Investing with a strategy built to last has a few perks.
Here are some of the main reasons why investors think long-term with an investment portfolio:
One of the best ways to see the benefits of long term investments is with an example.
Here’s what investing £250 a month could look like when you plan to leave it alone for up to five years, compared to a much longer time frame.
For this example, we’ve assumed your investments will grow at a 5% each year, but in reality some years it could be more and others less.
Short term
Long term
Past performance isn't a reliable indicator of future returns. Your investments, and the income you receive from them, may go down as well as up so you may get back less than you invest.
Now that you’ve seen the benefits of long-term investing, we’ll take a deeper dive into some potential investing strategies.
Even small fees and commissions can really eat into your potential long-term investment returns.
There are plenty of unknowns when it comes to investments. But, the broker and product you choose is something you can control. Using an app or platform that minimises your costs is a key part of any long-term investing strategy.
Here’s an example of how costs can make a big difference to your portfolio over the long run:
This example uses a £250 monthly investment, with growth estimated based on various fees and 5% growth.
This is just for illustration purposes and remember, a 5% yearly return isn’t a guarantee. But, it shows you how much money you could be leaving on the table when higher fees apply.
It’s these differences that mean long-term UK investors are often hunting for the lowest fees possible when researching the best broker to use.
And while having the lowest fees shouldn’t be the only thing you take into account, over time costs add up, so don’t just take a ‘low cost’ platform’s words for it.
There are no rules that state you must own stocks for the long term, but a well-considered buy and hold strategy is often the best course of action.
However, your individual investing goals and circumstances are going to help you determine how long you plan on holding stocks.
For example, you might be aiming towards one of the following goals:
Working backwards from when you’ll want to use the funds in your portfolio, should help you plan and position your portfolio.
Your investment portfolio is likely to fluctuate in value quite a lot over time. Afterall, stock markets are designed to move and reflect new information.
Success stories might lure you into trying to jump in and out of the market but unless you’ve got a crystal ball to hand, this is a risky manoeuvre.
You may get lucky once, but over the long-term, the data shows jumping in and out of markets is likely to bruise not boost returns.
Rather than thinking in big moves, often the best strategy is to invest small and often. This results in pound-cost averaging and means that you’ll be purchasing stocks when the prices are rising, and when they’re falling.
By doing this, over time you tend to be able to smooth out your entry prices. Sometimes you might end up overpaying, but you’re also likely to buy the dip if the market falls.
As the famous saying goes, ‘the best time to plant a tree was 20 years ago. The second best time is now.’
Having time on your side really helps give you more investment options. But, seeing as we haven’t yet invented a DeLorean that can travel back in time, it’s worth maximising the time you do have.
Starting to invest as soon as you can is a good approach to take with the stock market.
The longer you have, the more chance you’ll benefit from the magic of compounding.
And while investing comes with risks, thinking long term will also allow some room for error.
You’ll have longer to recover from mistakes. Or, potentially take on more investment risk in search of higher rewards.
There’s no such thing as a stock for the long term or short term.
Start by thinking about what you’re trying to achieve and then find investments that fit in with your plans.
Often, the secret ingredient for successful investors is to invest regularly into a diversified portfolio.
If you need a refresher on getting started with investing, make sure you take a look at our guide on how to buy shares for beginners.
Not all of the types of stocks outlined below will suit your investment blueprint but it’s always good to know your options. Your goals and attitude to risk, will generally mean you dial up or down different types of investments in your portfolio.
Stocks that promise future growth can be a good place to start if you’ve got one eye firmly set on the future.
Growth stocks are those that are expected to grow at a faster rate than the market average. They tend to be younger firms and may not always be profitable yet.
Money they do make is often channelled straight back into growth efforts rather than paid out as dividends.
Many tech stocks fall under the growth category and that means the way investors make money from them is through capital or share price appreciation.
The downside when investing in companies that promise jam tomorrow, is that it can be difficult to value or put a price on them. There tends to be more uncertainty around, so while there’s the potential for greater rewards, there’s more risk.
With a stock that pays dividends, you get some of the benefits of owning a stock today as well. Dividend stocks tend to already be profitable companies, after all this is where the dividend payment comes from.
One of the best things about receiving a regular dividend income is the potential to boost your compounding returns by reinvesting dividends.
Dividends aren’t guaranteed and income you receive from investments can vary just like share prices do. You only have to look back to the height of the pandemic to see that dividends can be taken away.
ETFs (exchange-traded funds) are often a popular investment option for long-term investors.
That’s because when you invest in ETFs, the fees can be lower than active funds, or if you were to replicate the funds investments yourself.
On top of this, you can benefit from diversification as one ETF will give you access to a basket of stocks.
Investing this way can be less time-consuming, involving a lower level of effort than if you were to individually pick your investments and stocks in a portfolio.
This is why ETFs are regularly touted as one of the best investments for beginners.
But, there are some downsides to bear in mind.
You’re unlikely to beat market returns over the long term because most ETFs passively track an index or sector. And, although you get some in-built diversity, with any single ETF you may still be overexposed to a particular sector or region.
The market-cap weighting also means that the biggest companies tend to get the bulk of your investment. So you could miss out on growth from small and mid-cap stocks.
Investment trusts have been around for a long time and some of the big players have remained a popular choice for years.
Investment trusts are funds (they also allow access to a basket of stocks and other assets through one investment) but they are set up and trade like a share on the stock market.
Trusts are actively managed to a specific investment objective that could be growth, income, or a bit of both. They also might be specialists in one area, perhaps an industry, long-term theme, or a country.
Trusts (like other companies listed on the stock market) have a fixed number of shares at any time, which means portfolio managers don’t have to worry about selling underlying investments when someone wants to take money out of the fund. This allows them to invest with a longer term time horizon than other types of funds and remain invested.
The drawback with investment trusts is that the expert management comes with a fee, as we mentioned earlier, fees detract from your investment returns.
Real estate investment trusts are mostly known by their shorter name ‘REITs’. They provide a way to invest in property without some of the usual obstacles.
When you buy REIT stocks, you’re essentially buying a piece of a property portfolio.
As a shareholder, you’re rewarded with dividend income that generally comes from renting out the properties in the portfolio. REITs actually have to pay out a certain amount of their income to shareholders each year.
Many REITs concentrate on certain niches such as warehousing, data centres or office blocks. Growing industries that need a home for the long term is a good way to sort through REITs.
This yellow metal has been used as a store of value for centuries.
But, the case for gold is not always as solid as you might imagine. Gold has often acted as a store of value over protracted periods, but the price has also been flat or volatile for big chunks of time.
Sometimes investors pile into gold without making a proper assessment. Gold can be a useful element of your investment portfolio, but don’t rush in thinking it’s guaranteed to appreciate.
The other downside with gold is that it doesn’t provide any sort of income, you’re reliant on the price. One way around this is to look at investing in gold and metal miners.
This can give you somewhat of a buffer, the potential to earn some dividends, and access other precious metals like silver.
If you’re dead set on investing in gold, you have multiple options when investing in commodities.
You can buy an exchange-traded commodity (ETC) that tracks the price of physical gold. Or, you might want to look into a gold mining ETF that invests in major mining companies.
When building your diversified portfolio, learning to analyse and evaluate stocks is an important skill to work on.
You don’t have to become an expert analyst either, understanding the basics will carry you a lot of the way and allow you to make better long-term decisions.
Understanding whether a company looks like a good or bad investment, should help you weigh up ETFs and investment trusts too.
Here are some key things to think about as you start to investigate different companies:
We invest to try and do more with our money.
And while it might not seem like a biggy, the account you choose to keep your investments in can make a big difference to your goal.
Using a stocks and shares ISA is one of the best ways to create a tax-efficient portfolio in the UK. While tax efficiency might sound a bit dull, it’s something that’s totally in your control and if ignored could see you paying unnecessary charges.
The main benefit of an ISA is that you won’t need to worry about paying UK dividend income tax or capital gains tax (CGT) on your investments. And, when drawing on your investments, funds withdrawn from your stocks and shares ISA won't be subject to income tax either.
When it comes time to start taking money out of your ISA, all withdrawals are tax free. So you get to keep more of any investment gains you make.
The ISA allowance for the 2024/25 tax year is £20,000. You can invest all £20,000 in a stocks and shares ISA or spread it across different ISA accounts, perhaps a cash ISA or Lifetime ISA.
Making the most of your ISA allowance each year is likely a really important step in building your wealth over the long term.
ISA eligibility and tax rules apply. Tax relief depends on your personal circumstances and current rules can change.
Depending on your age, investing for your retirement will typically be a lengthy affair.
If you’re in your 20s, 30s or 40s, investing for a retirement that’s still years away makes the process automatically long term.
When you invest in a Self-Invested Personal Pension (SIPP),you’re not able to access that money until you turn 55, r to 57 in 2028. And, given lots of us are working longer or have other sources of income in retirement like the State Pension or our workplace pension, often we don’t access our SIPP until much later on in life.
Given this time frame, pensions are built for long-term investing. This means you can often afford to take more risk, dialling up the share portion of your pension when you’re younger, as you have more time to ride out the ups and downs of the market.
Another major benefit of SIPPs is the opportunity to get tax relief (a government boost to your pot) on money you put into a SIPP.
The UK government sets limits on how much we can each contribute to a pension and get tax relief. Most savers can add up to 100% of their earnings or £60,000 (whichever is lower) to pensions in a year and benefit from the tax efficiencies.
You can add more than this to a SIPP, it just won’t attract the same tax relief and you could face a tax charge.
More on pension tax relief.
SIPP eligibility and tax rules apply. Tax relief depends on your personal circumstances and current rules can change.
Having time on your side is a real advantage in investing.
You’ve got more time to give your investments the opportunity to grow, you can afford to take more risk, and you should be less sensitive to short-term market movements.
Long-term investing is about having a game plan and sticking to it. And while you’ll need to be open to changing your portfolio at points, there’s unlikely to be regular chopping and changing.
We think investing should be open to everyone.
It shouldn’t be complicated, and it shouldn’t cost the earth. Our investing app makes it simple for both beginners and experienced investors. And costs are low. You can buy and sell shares commission-free and take advantage of fractional shares (buy just a part of a share).
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