When you hear from an investment advisor recommending “long-term investment” or read an article in financial news about being a long-term investor, what does that mean? How many years are considered long-term and how can a person invest for the long term?
Definition of Long-Term Investment
“Long-term” in relation to investment generally refers to a period of more than ten years. This is also generally true for classifying investors and bonds.
For example, if an investment advisor asks questions to measure your risk tolerance, they are trying to determine the types of investments suitable for you and your investment goals. Therefore, if you are young and do not expect to withdraw money from your brokerage account for at least ten years, you may be considered a long-term investor.
Bonds and bond funds are classified as long-term if the duration (or rather what’s known as the duration) exceeds ten years.
Best Options for Long-Term Investment
The first type of investment that most people think of when considering long-term investment is stocks. This is because they have historically achieved higher returns than other means of investment and savings, such as bonds and certificates of deposit (CDs). Mutual funds are an interesting way to invest in the stock market, particularly growth stock funds and aggressive growth stock funds. Many long-term investors also enjoy using index funds due to their low costs and tendency to achieve good returns over long periods, such as ten years or more.
Analysis and Research of 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 exceeding 10 years. However, “long-term” is often inaccurately used for periods that are not short-term, such as one year or less. This is because one-year periods do not reveal enough information about a fund’s performance or a fund manager’s ability to manage an investment portfolio through a complete market cycle, which includes periods of recession and growth and includes a bull market and a bear market. A complete market cycle usually lasts from 3 to 5 years but can last longer.
For this reason, it is important to analyze performance over 3, 5, and 10 years for an investment fund. You want to know how the fund performed during periods of market highs and lows.
Long-term investors often use a buy-and-hold strategy, where investment funds are chosen and bought but not significantly changed for up to several years or more. This strategy has been dubbed the lazy portfolio strategy.
How to Become a Long-Term Investor
A long-term investor can tolerate more market risk with their investments. Therefore, if they do not mind taking a relatively high risk, they might choose to build an aggressive investment portfolio of investment funds.
Aggressive investors are willing to accept periods of extreme market volatility (the highs and lows in account value) in exchange for the possibility of achieving relatively high returns that exceed inflation by a significant margin. An example of an aggressive portfolio asset allocation is 85% stocks and 15% bonds.
The Balance does not provide tax, investment, or financial services and does not offer advice. Information is provided without regard to the investment objectives or risk tolerance or financial circumstances of any specific investor and may not be suitable for all investors. Past performance is not indicative of future results. Investing involves risks, including the risk of losing capital.
Sources
The Balance only uses high-quality sources, including peer-reviewed studies, to support the facts in our articles. Read our editorial process to learn more about how we verify facts and maintain the accuracy, reliability, and quality of our content.
Investor.gov.
Investor.gov. “Bonds.” Accessed April 27, 2021.
Investor.gov. “Stocks.” Accessed April 27, 2021.
Source: https://www.thebalancemoney.com/long-term-investing-and-performance-2466573
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