Not all investments are created equal. Some are better suited for short-term goals, while others can help you build resources for objectives far in the future. As an investor, then, one of your biggest challenges will be to match your short- and long-term goals with the appropriate investment vehicles.
How should you proceed?
For starters, identify your short- and long-term goals. Your short-term goals will change throughout your life. When you are starting out in your career, for example, you might aspire to purchase a home in the next three to five years. Later on, though, your biggest short-term objective might be to save enough money for a long tour of Europe without picking up credit card debt.
As for long-term goals, your biggest one likely will be to enjoy a comfortable retirement, but you may well have other long-term plans, too, such as sending your kids to college in 10 or 15 years.
After you have a clear sense of your short- and long-term goals, you can choose the right investments to help you meet them.
Let's start with the shorter-term ones. When you're saving for a down payment on a home or for an expensive European vacation, you want to make sure that a certain amount of money will be available to you at a certain time. Consequently, you may want to avoid stocks or stock-based vehicles, which will constantly fluctuate in price, because you don't want the value of your investment to be down at the moment you need the money.
Instead, for short-term goals, you may want to consider a fixed-income vehicle, such as a bond, which is designed to provide regular interest payments and return your principal upon the bond’s maturity (providing the issuer doesn't default, which, with investment-grade bonds is generally unlikely).
For longer-term goals, such as college for your kids and a comfortable retirement for yourself, it’s a different story. To achieve these goals — and especially for retirement — you generally need to accumulate as much as you can. As a result, you need investments with growth potential, which means you will need to consider stocks and stock-based instruments. As mentioned above, stocks will always fluctuate in value, and they may be worth more or less than your original investment when sold. However, building a portfolio with an investment mix that's appropriate for your risk tolerance, and that contains a reasonable amount of growth-oriented vehicles, can potentially help you overcome short-term volatility and continue making progress toward your long-term goals.
Plus, you have some attractive long-term options available. With a 529 college savings plan, you can save for college and possibly achieve tax benefits, too. And by contributing regularly to your IRA and 401(k) or similar employer-sponsored plan, you can defer taxes while spreading your dollars among a wide range of investments. But there's one thing all long-term investments have in common: You need patience and discipline to stick with them.
So, there you have some ideas on short and long-term investing. Keeping this distinction in mind when you invest can help boost your confidence that you're making appropriate moves for all your goals.
This article was written by Edward Jones for use by your local Edward Jones financial adviser.