Investing long-term is one of the greatest methods of building wealth over a long period of time. In Canada, this could mean investing one’s money into numerous assets such as Toronto Stock Exchange, Mutual funds, or ETFs and also international real estate.
The purpose of investing long-term is to perform better than the market over an extended period which could ultimately be considered an advantage or disadvantage of long-term investing.
While investing long-term gives one a chance of having an upper hand, the patience to hold the investments for a long time can be a challenge. Long-term investments require one to have patience as there will be market dips and crashes and as such, selling off those investments can be tempting.
When investing, it is important to consider the risk and return on investments. It is a common phenomenon for investors to tether towards low risk investments for their retirement and refuse investing in riskier assets.
What are Long-Term Investments
These are investments that are held for at least one to three years. Long-term investment in itself, is a mindset. It entails holding investments through market crashes and bear markets hence why patience is emphasized upon.
Tips for Long-Term Investments
- Long-term investments require reducing fees and costs as much as possible. Buying low-cost assets and using brokerages that have little to no commission fees for trades is essential.
- It is also important to consider one’s risk tolerance. As a young person, one can take some chances by buying high-growth stocks and holding them for years. If one is older, it is advisable to go for less risky assets like value stocks and ETFs.
- Diversification of money across different assets is crucial. By stocks or ETFs and add some fixed income assets like bonds or high-reward assets like Bitcoin.
12 long-term investment options in Canada
1. High-interest savings account
This is one of the seamless ways to generate returns on money. In Canada, quite a number of financial bodies offer high-interest savings accounts with interest rates of $1 to $3. This particular asset is quite seamless and less stressful. Requirements are signing up for a high-interest savings account with a financial provider.
It’s particularly recommended for investors with large amounts of cash that do not want to keep for a stipulated period. It’s however a lesser option compared to other assets and its interest rate might not beat the inflation rate. Also, taxes will be on returns at a marginal rate unless it is a high-interest TFSA. interest rates are also lower than other assets such as GICs.
2. Robo – Advisor Portfolios
These have gained popularity over the years but they do not have a large number of Canadian investments. For this type of investment, financial services are provided through sophisticated computer algorithms instead of a fund manager as a result of the notion that emotional trading is a kryptonite of human investors.
Robo-advisors observe financial goals and risk tolerance before allocating funds. It is recommended for beginner-investors who are unsure of where to invest their money.
2023 has changed the dynamics of financial education as more financial institutions now offer robo-advisor advice.
3. Bond ETFs
Bond ETFs trade on major exchanges and hold different types of bonds. They are a fixed income asset and are known to be safer investments because of their sure monthly distributions. They can be purchased on any Canadian brokerage and known as a diversified investment portfolio.
Generally, bonds are inverse to stocks and thus act as a hedge against stock market changes. Bonds ensure a regular flow of income but investors are often taxed. They also have a higher expense ratio which eats into the long-term gains. Furthermore, they are excellent in a bear market but outperforming the market is rare.
4. Real Estate
Vancouver and Toronto are real estate hot spots in Canada. Residential assets are huge contributors to the canadian wealth. Real estate in Canada are frugal long-term investments.
Assets are often rented out or lived in but more often than not, it is usually worth more than what it was bought for when it starts yielding interest. It is however quite hard to break into as it requires a significant amount of capital and approval from a financial institution.
5 Equity ETFs
Known as Exchange Traded Funds, they are a group of stocks or assets that directly trade on major exchanges. Like individual stocks, they can be bought or sold but hold a diversified portfolio in a single convenient fund. They hold stocks that are usually from a specific sector or index and are recommended for long-term investors to hold different stocks for less capital.
Equity ETFs have a lower management fee and expense ratios than mutual funds. Also, they can be stored in registered accounts and TFSAs.
Furthermore, the trade-off for ETFs is a lower potential long-term growth in exchange for less change and downside risk. They can be purchased at any Canadian brokerage and an ideal building block for long-term investors.
6. Long-Term GICs
Also known as a Guaranteed Investment Certificate, it is a secure method of investing money for a period of five to ten years. They are very secure and low-risk for investors looking for a guaranteed return on their investment.
With a GIC, the longer the lock-up period, the higher the interest rates. Financial institutions, however, offer the GIs option of short-term and long-term.
7. Mutual Funds
Often confused with ETFs, they are actively managed by fund managers. However, they do not actively trade on exchanges and are directly bought from the managing institution and thus, have a higher expense ratio than ETFs. When mutual funds are purchased from a financial institution, units are bought instead of individual shares.
They are good investment options for beginners but long-term, lower-cost ETFs are usually more beneficial to own.
8. Growth Stocks
Growth stocks are ideal for young individuals who want to invest long-term. Growth stocks are stocks of a growing company that is yet to mature. Growth sectors include semiconductors, IT, fintech, and more. In Canada, they are long-term investments with high returns.
The downside however, is that they are usually the first to see their valuations and prices slashed in times of high-interest rates or bear market.
9. Dividend Stocks
Dividend stocks are one of the greatest builders of wealth over a long-term period. With dividend stocks, companies pay investors a portion of profits on a quarterly or monthly basis.
The stocks are usually of mature, high cash-flow companies. It can be a trade-off for low potential future capital growth from the stock’s price. They are also ideal for beginner investors. Dividends can be collected in both registered and non-registered accounts.
10. Alternative Investments
These are assets that do not fit into the traditional financial categories. They include gold, bitcoin, sport cards, antique cars, crowdsourcing, fractional real estate ownership, peer-to-peer lending and more. Their value is specific to their markets and can frequently fluctuate leading to changing asset values.
11. Money Market Securities
These are a group of short-term debt investment assets. They are usually locked up for a month to a year. They include treasury bills, commercial papers, and bankers’ acceptance. They, however, do not fall into the category of long-term investments.
12. Value Stocks
Value stocks and dividend stocks overlap. Most dividend stocks are value stocks but not all value stocks are dividend stocks. Often, they are the opposite of growth stocks. The mature companies that are financially stable. They include financial, consumer discretionary, and utility companies. Value stocks can be cyclical and thus fluctuate over time.
Investment Accounts for Long-Term Investments
- Registered Retirement Savings Plan (RRSP)
This account is very much associated with long-term investments in Canada. It is designed to be tax-friendly as it extends taxable income until one is retired. Interests made in RRSP investments are not taxed so long funds remain in the plan. Yearly contribution to RRSP is limited and it is calculated as a specified percentage of one’s earned income from the year before with any unused contributions from previous years.
- Tax-Free Savings Account (TFSA)
This was established in 2009 to enable Canadians to save or invest completely tax-free. Contributions are usually around $5000 to $6000 per person and are retroactive. Capital gains are tax-free and one can also transfer money without any penalty.
- Registered Education Savings Plan (RESP)
This account does not have a long-term bracket as an RRSP or TFSA. Its purpose is to invest in children’s education for future purposes and lifetime limit is CAD 50,000 per child. It is not tax deductible like RRSP.
Pros and Cons of Long-Term Investments
- They grow steadily when held for years. Dividends and capital growth can compound, ultimately building one’s wealth.
- Provides retirement wealth that can improve one’s quality of life.
- There are several investment assets and accounts in which one can hold them.
- It takes time and many investors fall prey to emotional trading and impatience.
- Amassing a large amount at retirement could lead to one paying a lot of taxes even with a low income.
- One could be taxed heavily for early withdrawals.