2022 was a rough year for investors. But that year is in the rearview mirror, and it’s time to focus on the best long-term investments for 2023.
Many investors watched their portfolios decline last year. Maybe you were one of them, but that doesn’t need to be the case in 2023. That’s because when you invest for the long term, the short-term declines become less important.
But that never means throwing caution to the wind. With the uncertainty that still grips the financial markets, it’s important to settle on the right mix of investments to maximize growth in your portfolio.
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What to invest in right now for the long term
There are dozens of potential investments for you to hold in your portfolio. But it’s more important to select a small number likely to produce the best returns.
1. Exchange Traded Funds (ETFs)
ETFs have grown to become one of the most popular investments. Not only does each one enable you to invest in a diversified portfolio of securities, but funds are available that cover hundreds of different asset classes.
Unlike mutual funds, ETFs can be traded just like stocks and purchased for the price of a single share or less. That makes it easy to diversify your portfolio with even a small amount of money. J.P. Morgan Self-Directed Investing Platform can give you the tools to help you evaluate the best choices.
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“I would suggest that people with a long-term time horizon invest in diversified, low-fee index funds,” recommends Robert R. Johnson, Ph.D., CFA, CAIA, Professor of Finance, Heider College of Business, Creighton University. “From 1926 through 2022, according to Ibbotson Associates, the compound annual rate of return of a diversified portfolio of large stocks (the S&P 500) was 10.3%.”
That’s an example of the returns in the general stock market. Specific sectors can have even higher yields.
“Investing in a diversified basket of small stocks provides even greater returns,” continues Johnson. “The compound annual rate of return of a basket of small stocks over those 95 years according to Ibbotson Associates was 11.9%.”
Some ETFs specialize in growth stocks, dividend stocks, value stocks, international stocks, and sector funds, like technology and healthcare. You can simply choose which asset classes you want to hold in your portfolio.
“The future is too uncertain for a single security or asset class,” adds Robert Michaud, Chief Investment Officer of New Frontier Advisors. “The best long-term investment is a diversified portfolio of stock and bond ETFs optimized for your long-term goals. If that’s not available, pair a global stock ETF with an aggregate bond ETF to manage risk.”
2. Dividend Stocks
Dividend stocks are among the best stocks to buy now. A big reason is they have a history of weathering stormy markets better than other stocks, like growth stocks.
“Given the current macroeconomic uncertainty, dividend-paying blue chip stocks are the preferred choice for this year,” advises Sam Boughedda, Equities Trader and Lead Stock Market News Writer at AskTraders.com. “They provide investors with a potential return on their investment in an unstable market. Well-known, high-quality companies provide some stability in the current unstable environment, with companies such as Apple, Mastercard, Visa, and Walmart being some of the better choices, in our opinion.”
You can do this by investing in a class of dividend stocks known as the Dividend Aristocrats. This is a group of more than 60 companies that are part of the S&P 500 and have produced at least 25 consecutive years of dividend increases.
The website Sure Dividend provides an updated list of these stocks each year. You can choose to invest in the companies you like or invest in the entire group through an ETF. The ProShares S&P 500 Dividend Aristocrats ETF (NOBL) is a popular example.
M1 Finance offers an all-encompassing investment solution, comprising a user-friendly mobile app and a desktop platform, aimed at demystifying and facilitating investing for individuals of all expertise levels. This empowers you to select your preferred dividend stocks with confidence. Additionally, M1 Finance provides automatic dividend reinvestment, ensuring your investments remain fully engaged at all times.
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3. Short-term Bonds
Historically, long-term bonds have provided higher interest than short-term bonds. But that’s not the case in 2023.
The table below shows the yield on US Treasury securities for the month of October, through the 23rd.
Notice that the latest return on a two-year Treasury note (5.57%) is slightly higher than that of the 30-year Treasury bond, at 5.01%. The range on all shorter-term securities, ranging from one month to two years, is higher than the yield on both the 30-year bond and the 10-year note.
This is what is known as an inverted yield curve. It’s not a common situation, but it is the current order of the day. And it favors investing in short-term bonds over the long-term variety.
“We can examine the yield curve about market expectations and use that information to improve our odds of a higher-than-market total return,” says John Cunnison, CFA and VP/Chief Investment Officer at Baker Boyer National Bank. “Currently, the yield is inverted, and that suggests that we are not being paid enough to own longer bonds. We accept a discount for owning longer bonds. For that reason, you should keep your duration on the shorter side of normal.”
There’s another advantage to shorter-term bonds. In a rising interest rate environment, longer-term bonds decline in market value. This is at best a minor problem with shorter-term securities, particularly those with durations of two years or less.
In that way, short-term bonds pay high interest while preserving your capital.
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4. Real Estate
Real estate is always competing with the stock market as the best long-term investment vehicle. In 2023, that competition shows no signs of changing anytime soon.
You can invest in individual properties, but that does require both a large amount of capital and hands-on management.
A much simpler way, and one that fits better within a portfolio, is to invest through real estate crowdfunding platforms.
“Historically, real estate has always been the best-performing asset class,” notes Patrick Donoghue, Vice President, Market Risk at Groundfloor Finance. “One of the best ways to invest is through private capital real estate deals. We’ve seen consistent 10% annualized returns across our portfolio. With fractional real estate investing, you can invest $10,000 at $100 each into 100 different projects and be well-diversified.”
Real estate crowdfunding platforms are a way to invest in property while getting the benefit of professional property management.
One of the best options in today's market is RealtyMogul. RealtyMogul is a crowdfunding platform for buying and selling commercial real estate. The platform is good for accredited and nonaccredited investors alike.
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A similar way is to invest in real estate investment trusts or REITs. These are funds that invest primarily in commercial real estate. That can include office buildings, retail space, large apartment complexes, and similar properties.
REITs trade like stocks and generally offer high dividend yields, as well as the potential for capital appreciation. It’s also an opportunity to invest in a portfolio of properties, which offers greater diversification than purchasing a single piece of real estate.
5. Alternative Assets
This category of investment assets has been growing in recent years. As it has, more opportunities have arisen for small investors to participate.
In general, alternative assets take in investments beyond stocks, real estate, funds, bonds, and other fixed-income assets. It can include private equity, fractional ownership of real property, precious metals, cryptocurrencies, and other assets.
“Our thesis is that the historical 60/40 equity/bond allocation is no longer a viable strategy,” advises Milind Mehere, Founder & Chief Executive Officer at Yieldstreet. “Increased correlations across assets and sectors lead to boom/bust outcomes. We recommend enhanced diversification through alternative investments, which provide reduced correlation and increased return potential in a modern portfolio of, say 40/30/30 equities, bonds, and alternatives, respectively. This modern portfolio is more accessible to investors than ever, including the ability to invest in alternative asset classes (such as real estate, private credit, and private equity) within tax-advantaged accounts.”
Yieldstreet is another crowdfunding investment platform offering alternative investments such as commercial, legal and art. Another excellent option for investing in art and diversify your portfolio is Masterworks. Masterworks will make investing in artwork easy, as it offers research and resources and provides users with a easy-to-use interface.
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If you do invest in alternatives, you should limit your position in any single asset class. Though alternatives have significant profit potential, they carry commensurately greater risk. For example, if you want to invest 10% of your portfolio in alternatives, you may want to split the allocation among five or more asset classes.
”By including an allocation to alternatives, an investor can further diversify their holdings—which is known to decrease a portfolio’s overall risk,” agrees Travis Forman, Portfolio Manager at Strategic Private Wealth Counsel, Harbourfront Wealth Management. “Should this year be just as tumultuous as the last, diversification will be key to protecting against market selloffs and volatility. Alternative investments include assets such as real estate, infrastructure, private equity, venture capital, hedge funds, private debt, and more.”
How to best invest for the long term
Investing is partially about choosing the right investments, but also about implementing the right strategies.
The following tips should help you be a better investor over the long term.
Plan to be in for the long term
Investing is much like building a business, in that it requires a long-term commitment. That will mean disregarding short-term dips in favor of a committed long-term outlook.
You should plan to be a regular investor, committing fresh capital even when the market is down. History has shown again and again that the markets eventually recover. But you’ll only be able to take advantage of the next surge if you’re in the market even when the outlook seems uncertain.
Know your risk tolerance
At its core, risk tolerance is your emotional ability to live with the risk of a declining market. Before you even begin investing, you should start by determining your risk tolerance.
Risk tolerance levels range between conservative and very aggressive, with several iterations in between. Knowing where you fall on the risk tolerance spectrum will be critical in developing a portfolio you’ll be comfortable with.
For example, if you’re more conservative, you should slant your portfolio in favor of bonds and dividend stocks. But if you’re more aggressive, you should favor growth stocks.
Vanguard offers a free Investor Questionnaire to help you determine your risk tolerance. Based on the answers you provide Vanguard will recommend one of nine asset allocations. You can then build your portfolio based on those allocations with the investment broker of your choice.
Diversify
When dividend reinvestment is included, the S&P 500 declined by 18.64% in 2022. No matter how optimistic you may be going forward, another decline in 2023 can’t be ruled out.
That’s why it’s important to be diversified, and that means investing beyond stocks alone. Even if the stock market begins to recover rapidly in the coming months, maintain adequate positions in both fixed-income investments and cash.
Not only will those positions minimize the impact of unexpected market declines, but they’ll also provide you with liquidity to take advantage of stocks at lower prices.
Keep contributing to your investment accounts
Investing is a strategy, not an event. You should have a plan in place to make regular contributions to your investment accounts. Contributions plus investment gains are the closest things to a secret sauce when it comes to investing. It gives you the benefit of growth coming from two different directions.
This is easy to do if you participate in an employer-sponsored retirement plan. Regular contributions into a 401(k) or equivalent program are easy and automatic.
But you can do the same thing with a traditional or Roth IRA, or even a taxable investment account, by setting up regular direct deposits from your paycheck.
One of the unexpected benefits of making regular contributions is taking advantage of dollar-cost averaging. Because your contributions will be a fixed amount, you’ll automatically buy more shares at lower prices and fewer shares at higher prices.
Fees matter!
If funds make up most of your portfolio, you’ll need to be aware of the fees involved. That will apply to either ETFs or mutual funds. Those fees can range from near zero to 1% or more per year. These aren’t just a cost of investing, but they also reduce your investment earnings.
If you invest in a fund with an average annual return of 7% and an expense ratio of 0.75%, your net annual return will be 6.25%. Over 20 years, a $10,000 investment will grow to $33,618.
If instead, you invest in a similar fund, also with an average annual return of 7% but with an expense ratio of 0.25%, your net annual return will be 6.75%. Over 20 years, the $10,000 investment will grow to $36,928.
The difference of $3,310 will represent the higher cost of the fund with the high-expense ratio.
By choosing a fund with a low expense ratio, you’ll win by default.
To get an accurate understanding of fund fees take advantage of the Fund Analyzer tool provided by FINRA. It provides analysis of more than 30,000 funds, helping you to choose those with lower fees.
Hire a financial advisor
If you want to invest and you have the cash to do it, but you’re not confident in your ability to manage your portfolio, consider hiring a financial advisor.
A good financial advisor will evaluate your risk tolerance, future goals, time horizon, and other obligations. That information will be used to create a portfolio that will best suit your unique investment style and preferences. Meanwhile, the advisor will provide ongoing management so you’ll be free to tend to everything else in your life.
If you’re not sure where to begin your search, WiserAdvisor provides an online database of financial advisors from both Fortune 500 companies and small independent firms. All advisors are subject to a qualification process to be eligible for inclusion in the network. You can also check out SmartAdvisor from SmartAsset. They provide a financial advisor matching tool webpage to help you find the right advisor for your needs and preferences.
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Alternatively, you can invest through robo-advisors. These are online, automated investment platforms that provide complete portfolio management at a very low annual fee. They’re perfect for smaller investors who lack the minimum portfolio size – sometimes $500,000 or higher – traditional financial advisors require.
Long-term investing is a long game
You don’t need to be a financial wizard to be a successful investor. But you do need to know the best long-term investments and have general strategies to manage them effectively.
Choose some of the investments and follow some of the strategies in this article. But if you don’t feel comfortable doing this on your own, don’t hesitate to engage the services of a good financial advisor.
Nothing less than your future financial success hangs in the balance. No matter what your investing history may be, you have an opportunity to increase the odds in your favor by making the right choices now.
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As an enthusiast with a deep understanding of investment strategies, let me guide you through the key concepts discussed in the article on the best long-term investments for 2023:
-
Exchange Traded Funds (ETFs):
- ETFs have become popular investments, offering diversified portfolios of securities.
- Unlike mutual funds, ETFs can be traded like stocks and allow for easy diversification even with a small investment.
- Diversified, low-fee index funds are recommended for long-term investors by experts like Robert R. Johnson, highlighting historical returns.
-
Dividend Stocks:
- Dividend stocks, particularly blue-chip stocks, are considered stable choices in uncertain markets.
- Dividend Aristocrats, a group of S&P 500 companies with a history of consecutive dividend increases, are highlighted for potential investment.
- M1 Finance is mentioned as a platform offering a user-friendly approach to investing in dividend stocks with features like automatic dividend reinvestment.
-
Short-term Bonds:
- The article discusses an inverted yield curve in 2023, where short-term bonds offer higher yields than long-term bonds.
- Short-term bonds are favored to manage risk in the current environment of uncertainty and potential rising interest rates.
- Public is mentioned as a platform where investors can buy treasury bills for as little as $100.
-
Real Estate:
- Real estate, considered a long-term investment, can be accessed through crowdfunding platforms like RealtyMogul.
- The article suggests that real estate has historically been the best-performing asset class.
- Real estate investment trusts (REITs) are highlighted as an alternative, offering diversification and high dividend yields.
-
Alternative Assets:
- Alternative assets, beyond traditional stocks and bonds, are recommended for enhanced diversification.
- Yieldstreet and Masterworks are mentioned as platforms offering alternative investments, including private credit, private equity, and art.
-
Long-term Investment Strategies:
- Long-term investing requires commitment, with an emphasis on disregarding short-term market fluctuations.
- Understanding and assessing risk tolerance is crucial for building a suitable portfolio.
- Diversification beyond stocks, regular contributions to investment accounts, and attention to fees are highlighted as key strategies.
- The article suggests hiring a financial advisor for those who lack confidence in managing their portfolios independently or considering robo-advisors for automated low-cost portfolio management.
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Considerations for Investors:
- The importance of knowing the fees associated with investment funds is emphasized, with a recommendation to use the Fund Analyzer tool provided by FINRA.
- The article also discusses the potential benefits of dollar-cost averaging, where regular contributions help investors buy more shares at lower prices.
- It concludes with a reminder that long-term investing is a strategic commitment, and making informed choices is essential for future financial success.
By following these concepts and strategies, investors can navigate the challenges and uncertainties of the market while positioning themselves for long-term growth and success.
