At various times, many people may feel frustrated by the
performance of their investments. For example, they expect growth, and they
don’t get it — or they think the value of their investment won’t fluctuate
much, but it does. However, some of this frustration might be alleviated if
investors were more familiar with the nature of their investment vehicles.
Specifically, it’s important to keep in mind the difference between long-term and short-term investments.
What defines long-term and short-term investments?
Long-term investments are those vehicles that you intend to hold for more than
one year — in fact, you generally intend to hold them for several years. On the
other hand, you usually hold short-term investments for one year or less.
You can find several key distinctions between short-term
and long-term vehicles. Here are a few to consider:
• They carry
different expectations. When you purchase an investment that you intend to
keep for many years, you may be expecting the investment to increase in value
so that you can eventually sell it for a profit.
In addition, you may be
looking for the investment to provide income. When you purchase a short-term
vehicle, you are generally not expecting much in the way of a return or an
increase in value. Typically, you purchase short-term investments for the
relatively greater degree of principal protection they are designed to provide.
• They meet different
needs at different times of life. You will have different investment needs
at different times of your life. When you’re young, and just starting out in
your career, you may require a mix of long- and short-term investments. You
might need the short-term ones to help pay for a down payment on a home, while
the long-term ones could be used to help build resources for your retirement.
But later in life, when you’re either closing in on retirement, or you’re
already retired, you may have much less need for long-term vehicles, with a
corresponding increase in your need for short-term investments.
• They can satisfy
different goals. If you purchase investments that you intend to hold for
the long term, you probably have a long-term goal in mind — such as building
resources to help pay for a comfortable retirement or leaving a legacy. On the
other hand, a short-term investment would be more appropriate if you know that
you will need a certain amount of money at a certain time — perhaps to purchase
a car or to fund a vacation.
• They carry different
risks. All investments carry some type of risk. One of the biggest risks
associated with long-term investments is volatility, the fluctuations in the
financial markets that can cause investments to lose value. On the other hand,
short-term investment vehicles may be subject to purchasing power risk — the risk that your investment’s return will
not keep up with inflation.
As an investor, you’ll probably need a mix of long-term
and short-term vehicles. By knowing the differences between these two categories,
you should have a good idea of what to expect from your investments — and this
knowledge can help you make those choices that are right for you.
This article was written by Edward Jones for
use by your local Edward Jones Financial Advisor.
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