What's the difference between short and long-term investing?
Last updated 3/21/2020 at 2:57pm
FALLBROOK – As you go through life, you'll have many financial goals. Fortunately, you don't need to achieve them all at the same time. But when you have a mix of short- and long-term goals, you will need to pursue some different investment strategies simultaneously.
Your short-term goals may depend somewhat on your stage in life. For example, when you're starting out with your career and you're beginning to raise a family, you may well have a goal of saving enough money for a down payment on a home. Later on, though, you may decide you want to travel the world for a year.
Because you know about how much money you'll need, and when you'll need it, you can choose the appropriate investments, with these characteristics:
• Low risk – Above all else, you want the right amount of money to be there when it's time to use it. So, you'll need low-risk, high-stability investments. You won't see much in the way of growth from these types of investments, but you also won't be sweating every single market downturn in fear of not reaching your goal.
• Liquidity – You won't want to worry about trying to find a market for your investment when it's time to sell it and use the proceeds for your short-term goal. That's why you need to pick short-term vehicles that are highly liquid.
So, what kinds of investments meet these criteria? You actually have quite a choice, including mutual funds consisting of short-term corporate or government bonds; certificates of deposit; cash management accounts; money market accounts; and U.S. Treasury securities.
Now, moving on to longer-term goals, the situation can be quite a bit different. Suppose, for instance, you're saving and investing for a retirement that may be three or four decades away. For this goal, you have one overriding motivation: to end up with as much money as possible. And since you have so many years until you need this money, you may be able to take on more risk than you could with the investments you counted on for your short-term needs. It isn't to say you should be reckless, of course – you still need to pay attention to your individual risk tolerance. Overall, though, there's a big philosophical difference, in terms of risk capacity, between investing for the long term versus the short term.
When you're saving for a long-term goal such as retirement, you may need to rely primarily on your individual retirement account and your 401(k) or similar employer-sponsored retirement plan. And within these accounts, you'll need a reasonable percentage of growth-oriented investments such as stocks and stock-based mutual funds. It's true that stocks are volatile, with sometimes sharp price declines. But in exchange, you get far greater growth potential than you would with any of the short-term investments named above. Furthermore, the longer you hold stocks or stock-based investments, the more the price volatility tends to even out. Keep in mind that there are no guarantees of profit.
So, there you have them: short- and long-term investments. A financial professional can help you choose the ones that can help you keep moving toward all your goals, whether they're three years or three decades away.
Edward Jones financial advisor Brian Schrock is located at 1434 S. Mission Road, Suite B, in Fallbrook. For more information, call (760) 731-3234.
This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.
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