Investing is a great way to make money, especially when saving for retirement, college, or other big financial events in your life. Mutual funds are a popular investment, and more people use them as long-term investments than short-term ones. Are mutual funds safe for long-term investments?
Mutual funds are safe for long-term investments because of their diversification and ability to produce large capital gains. Even though mutual funds can suffer losses just like any other investment, any losses are offset by the gains, so your money is safe for the long term.
This article will briefly explain what long term investments are and their advantages, with a narrowed down focus on discussing what makes mutual funds a safe investment for the long run. Additionally, I will share some beginner resources that you can leverage to learn more about mutual funds to further explore if they are a good investment for you.
Let’s get started, shall we?
IMPORTANT SIDENOTE: I surveyed 1500+ traders to understand how social trading impacted their trading outcomes. The results shocked my belief system! Read my latest article: ‘Exploring Social Trading: Community, Profit, and Collaboration’ for my in-depth findings through the data collected from this survey!
Table of Contents
What Are Long-Term Investments?
Long-term investments usually last ten years or more. Since these investments last a long time, they can have riskier investments than short-term investments.
When you make long-term investments, you can afford to suffer a loss early on because there is plenty of time to make up for it with large gains.
Even though long-term investments can afford to be riskier, they can pay off with some very large gains. If you make a high-risk investment, you can generally expect to see a high reward. Many long-term investments will have a high amount of riskier stocks and a small number of safe bonds.
For example, if a 35-year-old wants to invest in a mutual fund as part of their retirement plan, they will likely find a fund to earn them money for a couple of decades. Since they have thirty years to earn money, they can choose a mutual fund with high-risk, high reward stocks.
If the stocks are successful, they receive a good payout for their investment, but if there is a big loss, there is plenty of time to recover from the loss and turn around the fund to make some money despite the loss. Long-term investments make most losses insignificant because of the gains that offset them.
Mutual funds are usually a long-term investment since they include risky and safe stocks and bonds.
They can also be long-term investments because they are managed by someone other than the investors. Having someone else manage the mutual fund allows the investors to leave their money in the fund for a long time without constantly worrying or managing their money.
How Safe Are Long-Term Mutual Funds?
Mutual funds can be safe investments, especially in the long term. There are a few reasons why mutual funds are safe long-term investments, including:
- Diversification of the portfolio.
- Ability to have risky investments.
- The losses are offset by gains.
Mutual funds are highly diversified investments meaning they have many different stocks, bonds, and other securities. They can be more diversified than an individual portfolio because there is much more money in the fund to buy a wide range of investments.
If you diversify your portfolio, and a certain type of stock or bond starts to lose value, plenty of other investments within your portfolio will keep their value to offset the loss.
With mutual funds, you are not putting all of your money in one basket, and having your money spread out among many assets is especially important with stocks since they are riskier. If you have multiple types of stocks, you will decrease your overall risk.
When you invest in mutual funds earlier in life for a longer period, you have more of a chance to recover from any losses that might occur.
If your mutual funds have a losing year or the stock market has a bad period, your mutual funds will have time to recover the losses and turn them into gains. But if you only invest in a mutual fund for a few years, and the stock market sees a decline in those years, you will end up with a net loss.
Most mutual funds require fees and taxes from their investors, which are typically higher than other types of investments. When you use mutual funds as a long-term investment, you might ideally make up for them with the money you earned on the investment plus extra, if you’re lucky.
If you are frequently buying mutual funds, you could have a loss on top of the fees, so you may want to limit purchasing more funds to a few per year.
Risks of Mutual Funds As Long-Term Investments
While mutual funds are safe long-term investments, there is risk associated with them, just like any other investment. There is no guarantee that your investments will make money, even over ten years or more.
The stock market has no guarantees, and even though mutual funds are diversified to include safer investments, the losses can be big.
You could have a ten-year mutual fund that suffers a big loss in the last couple of years with no time to return. While you could still have gained from the earlier years, the overall gains could be smaller than you expected.
A possible solution is to withdraw your money early after a couple of successful years.
However, you often will incur large fees to remove your money early if you are invested in a mutual fund for an amount of time agreed upon at the beginning of the investment. But if you think that withdrawing early is the best option, you will need to consider the fees associated with this and decide if the gains are high enough to make it worth it.
Learn More About Mutual Funds
If you think mutual funds are a good long-term investment for you, it is important to educate yourself on them before you make a final decision.
While mutual funds are a safe long-term investment, there are many factors that you should consider, including:
- The length of the mutual fund.
- The risk of the investments in the fund.
- The taxes and fees you will need to pay to invest in the mutual fund.
Books are a great way to learn about a mutual fund for beginners and more advanced investors alike. Here are some great books from Amazon.com:
- Mutual Funds: The Mutual Fund Retirement Plan for Long-Term Wealth Building: This book will help you understand the benefits of investing in mutual funds, as well as how to make a plan to use mutual funds for building retirement wealth.
- Common Sense on Mutual Funds: This is another great book by a long-time mutual fund investor John C. Bogle. He will teach you how mutual funds work in today’s market, investing tips that you can apply to all types of investments, not just mutual funds, and how the mutual fund market has changed over time.
Finally, this video from TD Ameritrade will teach you the basics of mutual funds, including how mutual funds work and how to choose mutual funds that are best for you:
Author’s Recommendations: Top Trading and Investment Resources To Consider
Before concluding this article, I wanted to share few trading and investment resources that I have vetted, with the help of 50+ consistently profitable traders, for you. I am confident that you will greatly benefit in your trading journey by considering one or more of these resources.
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Conclusion
Like any investment, mutual funds involve several risks, but mutual funds are safe in relation to other investments in the long term. The diversification and rebound time of long-term mutual funds are benefits that can keep your money safe and earn you capital gains while your money is invested.
Learning about mutual funds is important if you want to invest in them to find the best one for your financial needs and decide how long you want to invest in a mutual fund. Picking a good, long-term mutual fund will be a big help to your future financial success.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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