For investors, long-term allocation allows investments to continue being profitable in later years. Long-term allocation is an essential part of a balanced portfolio. This helps manage risk, because short-term allocation can be riskier and lead to losses if there is not a counterweight of long-term, dependable investment choices in assets that can be counted on to produce a profit over years and decades. Most long-term allocations are designed to produce maximum earnings before retirement.
In general terms, long-term assets are assets that last longer than a year. This can have two important definitions in terms of finance. First, a long-term asset can be the subject of allocation of investment funds for the long term, when investors want to be sure of obtaining profits not only years but decades down the line. Also, a long-term asset can be a business asset that increases value and is necessary for operations, requiring a specific business account and category for the recording of its expense.
Long-Term Allocation Purpose
Investors can choose several assets for such long-term allocation. For example, stocks are a popular long-term investment option. While stock can lose money over the short term and may even lead to losses over an entire decade, as years pass they often provide the soundest long-term investment for increasing in value. Long-term bonds, such as those that have maturity dates 30 years into the future, are also potential investments, although bonds are less flexible than stock and often follow different cycles. Investors prefer bonds for their relative safety (especially government bonds and those of large corporations), and they choose stock for its greater earnings potential.
Accounting for Long-Term Assets
When businesses invest in long-term assets, they expect these assets to last longer than a year. This means the company must account for the expense as a depreciation over time, matching the total expense to the value received from the asset. As the asset is used, the expense is distributed over its useful life until the asset wears out. This allows businesses to both balance income reports and match its costs to the profit produced.
Different Asset Categories for Business
The business must also allocate the long-term asset to the proper category when creating its budgets and balance sheets. There are two general types of asset categories -- tangible and intangible. Tangible assets are divided into property, plant and equipment categories for long-term assets. Intangible asset categories include patents and rights to trademarks or other licenses.