When you hear the investment term, "long-term investing," you can assume it refers to periods of at least 10 years or more. Therefore the best mutual funds for long-term investors are the funds that are appropriate to buy and hold for a decade or more.
For example, if an investment adviser asks questions to gauge your risk tolerance, they are seeking to determine what investment types are suitable for you and your investment objectives, which includes the time frame in which you will be investing. The same goes for you as a do-it-yourselfer: it is important to pick the best funds that are suitable for you and your personal finance needs. So if you don't expect to make withdrawals from your brokerage account for at least 10 years, you may be considered a long-term investor. If you don't lose sleep at night worrying about how your mutual funds are performing on a daily, monthly, or quarterly basis, you can take some extra risk and be more aggressive.
How to Be a Long-Term Investor
Often, a long-term investor employs a buy and hold strategy, where mutual funds are selected and purchased but not significantly changed for up to several years or more. This strategy has also been affectionately labeled as a lazy portfolio strategy.
A long-term investor can afford to take more market risk with their investments. Therefore, if they don't mind taking a high relative risk, they may choose to build an aggressive portfolio of mutual funds.
Aggressive investors are willing to accept periods of extreme market volatility (ups and downs in account value) in exchange for the possibility of receiving high relative returns that outpace inflation by a wide margin. A sample aggressive portfolio asset allocation is 85% Stocks, 15% Bonds.
Examples of the Best Funds for Long-Term Investing
The first investment type most people think of with regard to long-term investing is stocks. This is because they have historically achieved higher average rates of return than other investing and saving vehicles, such as bonds and Certificates of Deposit (CDs). Stock mutual funds, especially growth stock funds and aggressive growth stock funds are suitable for most long-term investors. Many long-term investors also like to use index funds for their low-cost and their tendency to average good returns over long periods, such as 10 years or more.
Fidelity Investments offer some of the best no-load aggressive growth funds, such as Fidelity Growth Company (FDGRX), Fidelity Mid-Cap Stock (FMCSX) and Fidelity Low-Priced Stock (FLPSX). Vanguard has one of the best S&P 500 index funds, the Vanguard 500 Index (VFINX).
Your first order of business in building a portfolio of mutual funds is to determine your risk tolerance and your holding period. In general, the longer your holding period, the greater your capacity to take the risk.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.