“Long term” refers to the extended period of time that an asset is held. Depending on the type of security, a long-term asset can be held for as little as one year or for as long as 30 years or more. Generally speaking, long-term investing for individuals often falls in the range of at least seven to ten years, although this is not a hard and fast rule.
Key Takeaways
- “Long term” refers to the extended duration over which an asset is held.
- The threshold for a long-term asset typically begins at one year.
- “Long term” is subjective and varies by investor; with significant tax implications for assets sold before and after the one-year mark.
- Long-term investments are listed as assets on a company’s balance sheet.
- Short-term investments are marked-to-market, with declines recorded as losses and increases recognized upon sale.
Understanding Long Term
“Long term” is a frequently used phrase in finance but remains difficult to define precisely. Recommendations to “invest for the long term” are common, but the interpretation is subjective. For instance, a day trader may consider holding a position overnight to be long-term, whereas a buy-and-hold investor may think of several years of holding time as a starting point for long-term.
Long-Term Investing for Companies
On a company’s balance sheet, long-term investments are categorized on the asset side. These could include stocks, bonds, real estate, and cash, held for more than one year.
Whether investments are marked as short-term or long-term directly affects their valuation on the balance sheet. Short-term investments are reported based on their market value, with losses recognized immediately but gains noted only when sold. This classification has a direct impact on the reported net income of the company.
Analysts often monitor the shifts in long-term assets as it may indicate a company is liquidating its assets to cover current expenses, a potential signal of ongoing financial issues.
Long-Term Investing for Individuals
For many individuals, the primary long-term financial goal is saving and investing for retirement. While other major expenses like buying a home or paying off loans can require a long-term financial strategy, retirement planning is typically the driving force behind most investment portfolios.
Real estate, often considered a long-term investment, involves holding property either until it is fully paid off or until it appreciates significantly over the years. Profitable securities held for over a year are subject to capital gains tax, unlike those sold within a year, which are subject to ordinary income tax.
Stocks, mutual funds, and ETFs can be long-term or short-term investments, depending on the holding period. Individual stocks can be liquidated within weeks or held for years to maximize potential appreciation.
Utilizing a long-term outlook and the power of compounding allows investors to take calculated risks over decades, smoothing out market fluctuations for higher overall returns.
What Is Considered a Long-Term Investment?
Long-term investments generally include securities held for more than one year, such as stocks, bonds, real estate, mutual funds, and ETFs.
Characteristics of a Long-Term Investment Strategy
A long-term investment strategy involves holding securities for a year or more. Due to the unpredictability of future outcomes, these strategies carry a higher amount of risk but aim for price appreciation over the long haul. Diversification is key to stabilizing volatility within a portfolio over the long term.
Is Gold a Good Long-Term Investment?
While gold has traditionally been seen as a hedge against inflation and a store of value, historical data shows that stocks and bonds tend to outperform gold over long-term periods. However, during specific periods, gold can indeed outperform these other asset classes.
What Are Long-Term Marketable Securities?
Marketable securities typically include investments such as stocks, bonds, and ETFs that are considered current assets expecting to be sold within a short-term window, usually a few months. These securities are highly liquid, with numerous buyers available to facilitate quick sales.
Why Are Long-Term Securities Less Liquid?
Long-term securities are less liquid because they require longer holding periods to realize full value or profits. Assets like real estate appreciate over longer periods and cannot be easily or quickly liquidated. Bonds with longer maturities offer higher yields over time, necessitating extended holding durations.
Related Terms: compounding, capital gains tax, mark-to-market, day trader, buy-and-hold.
References
- Internal Revenue Service. “Topic No. 409, Capital Gains and Losses”.
- U.S. Securities and Exchange Commission. “Beginners’ Guide to Financial Statements”.
- U.S. Securities and Exchange Commission. “Mutual Funds and Exchange-Traded Funds (ETFs) – A Guide for Investors”.
- Analyzing Alpha. “Stocks, Bonds, and Gold Returns from 1922+”.
