When you hear an adviser recommend a "long-term" investment or you read a financial news article about being a long-term investor, what does that mean? How many years is long-term how does one go about investing for the long-term?
Definition of Long-Term Investing
Long-term, with regard to investing, generally refers to a period greater than ten years. This is also generally true for categorizing investors as well as bond securities.
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. Therefore, if you are young and you don't expect to make withdrawals from your brokerage account for at least ten years, you may be considered a long-term investor.
Bonds and bond funds are categorized as long-term if the respective maturity (or more accurately what is called duration) is longer than ten years.
The Best Options for Long-Term Investments
The first investment type most people think about long-term investing in 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 are an interesting way to invest in the stock market, especially growth stock funds and aggressive growth stock funds. 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 ten years or more.
Analysis and Research for Long-Term Performance Funds
When researching and analyzing investments, especially mutual funds, it is best to look at long-term performance, which can be considered a period of 10 or more years. However, "long-term" is often loosely used about periods that are not short-term, such as one year or less. This is because 1-year periods do not reveal enough information about a mutual fund's performance or a fund manager's ability to manage an investment portfolio through a full market cycle, which includes recessionary periods as well as growth and it includes a bull market and bear market. A full market cycle is usually 3 to 5 years but can last longer.
This is why it is important to analyze performance for the 3-year, 5-year and 10-year returns of a mutual fund. You want to know how the fund did through both the ups and the downs of the market.
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 the lazy portfolio strategy.
How to Be a Long-Term Investor
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.