Advantages and disadvantages of long-term financial investments

9 January 2023
Ventajas y desventajas de las inversiones financieras a largo plazo

The investment world does not discriminate against anyone. Regardless of the needs that each person has, it is very likely that there is an alternative that satisfies them. It doesn't matter if you are looking to make a quick profit or for long-term financial investments. There will always be a modality that meets your expectations.

When an investment lasts more than one year, it falls into the second category. The main characteristic of long-term financial investments is that it will take the saver a minimum of twelve months to recover his initial investment and enjoy the interest of the operation. And, although during this period, his liquidity will be affected since he will not be able to dispose of that amount, this sacrifice is compensated by a series of benefits.

Although long-term financial investments have this minimum period, there is no established limit to their maximum duration. The investment can be spread over a year, five years or even several decades.

Let us illustrate this with two examples. First, a saver is convinced of the potential of a company belonging to a sector that, according to experts, is set to lead the future. So he invests in a technology firm seeking financing to establish itself in the market, knowing that he will not reap the rewards for some years.

Pension plans, on the other hand, are a perfect illustration of the longest-lived long-term financial investments. Some people start investing in this instrument from the age of 35 to have more money when the time comes for retirement, even if they still have to contribute for another three decades.

A modality that appeals to many savers

In recent years, the financial environment has become highly personalized. The formulas were much more rigid in the past, but they have become more flexible to attract more people.

As a result, institutions are developing a wide range of products to suit the specific needs of all companies and savers. Long-term financial investments are tangible evidence of this.

Like the others, these mechanisms have several advantages and disadvantages. However, this does not make them a good or bad alternative. To assess their suitability, each person's individual circumstances must be considered. Depending on whether they match what you are looking for, they will be more or less suitable for your situation.

Long-term financial investments are not for everyone. There are always ups and downs in the market, some more pronounced than others. And it is crucial to have patience and confidence in the future potential of a company so as not to lose your peace of mind in times of loss. Giving in to panic in these situations can take its toll later. If the market recovers and you have already sold your investment, you could even lose part of the money you originally invested.

Advantages of long-term financial investments

The first point in favor of long-term financial investments is that, by playing over very long periods, they do not depend so much on the occasional variations suffered by the market. This gives them very attractive stability: even if, at times, their value declines, this is compensated by the gains that are likely to occur later.

On the other hand, the decisions taken by the saver will not be so influenced by present circumstances. It is undeniable that the current state of the market has a great deal of influence on decisions. At the first signs of a fall, the investor may be tempted to withdraw his investment to avoid a greater evil.

However, it is impossible to back out of many long-term financial investments. In this way, the markets are allowed to recover, and the gain could be substantially higher, even if it is not visible at the time.

Since the investor is not dependent on these profits and is not in a hurry to obtain them, he can think through his movements better without feeling the pressure. And at the same time, he will not be checking the status of his investment every so often. Therefore, if you know that you cannot withdraw the money until next year, you will live more calmly without constantly checking whether you are making profits or losses.

Finally, in this type of operation, it is frequent that the investor is obliged to pay commissions for the purchase or sale of the products. In short-term financial investments, the total number of movements is usually much higher, so the amount to be paid rises considerably. This does not occur in long-term financial investments.

Ventajas y desventajas de las inversiones financieras a largo plazo

Disadvantages of long-term financial investments

As always, all that glitters is not gold. Long-term financial investments also have several drawbacks, which may deter some people from investing.

To begin with, if the investor goes through a bad period and needs liquidity, he will not be able to recover that money until the end of the term. And, if he wants to get it before the maturity date, he will likely have to pay the penalty derived from that early withdrawal.

Therefore, long-term financial investments are not accessible to everyone since the saver should have an economic cushion that guarantees his subsistence, or he runs the risk of running out of funds.

On the other hand, although the returns are usually higher than in many short-term options, they are not always the most profitable in the market. In short-term financial investments with a strong risk component, the return may be higher, thus providing an incentive to invest.

It should also be borne in mind that, as time goes by, money loses part of its value due to inflation. For example, the amount of products we could buy in a supermarket with one hundred euros two years ago is significantly higher than what we can buy today. Consequently, a thousand euros invested in the present will be worth more than that thousand euros in a decade.

For this reason, the investor must ensure that he will make a sufficient profit to offset the effect of inflation and enjoy a profit.

Types of long-term financial investments

There is a multitude of alternatives for people interested in long-term financial investments. This variety opens the doors of this world to all kinds of people because, even if one of the options does not match their demands, there will be another one that fits them.

Stocks are one of the most popular long-term financial investments. This investment mechanism is very democratized, as most savers turn to the stock market to get a return on their assets. They simply buy shares in companies listed on the stock market. If the share price rises, they receive a corresponding gain.

If fixed income is preferred instead of equities, bonds can be used. If governments issue these debt securities, they are called sovereign bonds. When private companies are responsible for issuing them, they are known as corporate bonds.

Individuals can also invest in currency trading or commodity futures, purchasing gold, silver, oil, and grains..... These products are traded on the markets and are exchanged as if they were stocks.

Other savers opt for mutual funds, built on the contributions of a large number of individuals and managed by a company in charge of their management.

Exchange Traded Funds (ETFs) are a type of investment fund listed on the stock exchange, imitating the behavior of a certain index, which they take as a reference. If the index rises, they will offer a return. But they can also work in reverse and be profitable when the market falls.

What about ethical investment?

Not all long-term financial investments have to fit into conventional channels. There is also a place for ethical investment.

People who are committed to financing invoices work more in the short term. But some alternative financing platforms include options aimed at savers who want to invest with an eye to the future.

However, regardless of the chosen modality, it is crucial to keep in mind that market volatility is very high. Many factors influence the health of the markets and multiply their instability. The same investment can take off or collapse from one day to the next.

Long-term financial investments are not for everyone. People who embrace them will not have their money for a long time. And it is essential not to lose confidence in the company's potential without getting carried away by current market trends. But often, the returns they offer as a reward are worth it.

alternative finance financial literacy investments
Inversa Team
Inversa Team

If you would like to contribute to Inversa's Blog as an expert, become a knowledge partner.

Sign in