Today we are going to discuss one way to minimize risk when we invest: by short and long term investing. Being invested properly is an important component to having a sound financial plan, part of being invested correctly includes making sure that the amount of risk you take matches your time horizon.
For example, let’s say that short term financial goals include goals you would like to achieve in the next three to five years. This, then, is money that should be invested in a way that will minimize the risk of losing money in the short-run.
For most people, it makes sense to fund goals that you want to accomplish in less than five years with lower-risk investment vehicles. Options that fall into this category include current income sources like your income from work, money markets, savings accounts, Certificates of Deposit — also known as CDs — or possibly short-term bond funds.
Money market accounts and savings accounts are places to keep funds that you want to be able to access easily and without worry that the money will fluctuate in value. Money markets do carry some risk, but that risk has historically been very minimal. A CD may offer a higher a interest rate for locking your money up for a period of time – usually anywhere from three months to five years, and a short-term bond fund may offer a better return but carry some risk that your principle may fluctuate in value.
Now let’s look at longer-term goals– things that you want to happen later – five or more years from now. Most people need to save and invest in order to reach these goals, so you will need to make some decisions here. As you know, investments that provide the potential for higher returns generally also carry higher levels of risk. It’s important that you design your investment portfolio in a way that matches your comfort level with risk–that is, your tolerance for changes in the value of your investments. When there is a mismatch, people can make emotional decisions that end up hurting them in the long run.
Let’s look at an example of investing for the long term…let’s say funding college for your kids is a goal, and it will take place in six years. You may decide to invest in securities that carry some risk so that you have more growth potential.
However, you probably won’t want to take as much risk as you would with money invested for your retirement, say…25 years from now. Why? Because you have more time to ride-out volatility and potentially make up for down years that might occur during the 25-year timeframe than you would during the six-year timeframe.
For most people, longer-term investing means investing in the stock market in some form or fashion in order to maximize earning potential. Make sure to tune in next week because we will be taking a look at different ways of investing in the stock market for the long term.
And as always, if you need help understanding if your financial accounts are invested correctly for your time horizon, please reach out to me! I’m happy to explain in more detail!
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. We suggest that you discuss your specific situation with your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.
Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.
Dollar cost averaging involves continuous investment in securities regardless of fluctuation in price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.
All investing involves risk including loss of principal. No strategy assures success or protects against loss.