Why do you invest? If you’re like most people, you’d probably say that, among other things, you want to retire comfortably. Obviously, that’s a worthy long-term goal, requiring long-term investing. But as you journey through life, you’ll also have short-term goals, such as buying a second home, remodeling your kitchen or taking a much-needed vacation. Will you need to invest differently for these goals than you would for the long-term ones?
To answer that question, let’s first look at how you might invest to achieve your longer-term goals. For these goals, the key investment ingredient is growth – quite simply, you want your money to grow as much as possible over time. Consequently, you will likely want a good percentage of growth-oriented vehicles, such as stocks and other stock-based investments, to fund your 401(k), IRA or other accounts.
However, the flip side of growth is risk. Stocks and stock-based investments will always fluctuate in value – which means you could lose some, or even all, of your principal. Hopefully, though, by putting time on your side – that is, by holding your growth-oriented investments for decades – you can overcome the inevitable short-term price drops.
In short, when investing for long-term goals, you’re seeking significant growth and, in doing so, you’ll have to accept some degree of investment risk. But when you’re after short-term goals, the formula is somewhat different: You don’t need maximum growth potential as much as you need to be reasonably confident that a certain amount of money will be there for you at a certain time.
You may want to work with a financial professional to select the appropriate investments for your short-term goals. But, in general, you’ll need these investments to provide you with the following attributes:
Protection of principal – As mentioned above, when you own stocks, you have no assurance that your principal will be preserved; there’s no agency, no government office, guaranteeing that you won’t lose money. And even some of the investments best suited for short-term goals won’t come with full guarantees, either, but, by and large, they do offer you a reasonable amount of confidence that your principal will remain intact.
Liquidity – Some short-term investments have specific terms – i.e., two years, three years, five years, etc. – meaning you do have an incentive to hold these investments until they mature. Otherwise, if you cash out early, you might pay some price, such as loss of value or loss of the income produced by these investments. Nonetheless, these types of investments are usually not difficult to sell, either before they mature or at maturity, and this liquidity will be helpful to you when you need the money to meet your short-term goal.
Stability of issuer – Although most investments suitable for short-term goals do provide a high degree of preservation of principal, some of the issuers of these investments are stronger and more stable than others – and these strong and stable issuers are the ones you should stick with.
Ultimately, most of your investment efforts will probably go toward your long-term goals. But your short-term goals are still important – and the right investment strategy can help you work toward them.
This article was written by Edward Jones for use by Olivia Young Financial Advisor with Edward Jones.