Investing Tip:

Long Term Investments Are For The Long Term

This sounds redundant doesn't it? You say of course they are! Yet I frequently meet people who don't understand this basic principal. Volatile investments such as stocks, bonds and real estate are not short term investments, and are not appropriate as such. Six months or a year is *not* a definition of long term.

Let's look at a stock market example. A couple wants to buy a house in 18 months and figures to raise the down payment they need by investing in the stock market. They invest $10,000 that they've saved, but now after 18 months it's actually *down* to $8,000. Now they are faced with tough choices. Settle for less house, put less money down, or maybe wait an extra year or two (or three). What typically happens is the couple gets discouraged and pulls their money out, deciding that stocks just aren't safe because they "lost money". It doesn't help this couple that if they'd waited *five* years their $10,000 might have grown to $20,000. They didn't double their money, instead they lost 20%.

Investments such as stocks are only appropriate if you have a three year or longer time horizon (and five years is better still). It's *possible* of course that you will make money much more quickly, but you can't count on it. You can find many one or two year periods where stocks are down. But three year downturns are unusual. You greatly increase your chances of profitability with a three year or more time horizon.

What if you need your money in less time? Then long term investments are not for you. Find a high yielding bank CD or money market account. Sure it's boring, but you'll know with certainty that your money will grow over your time frame.

If you only invest long term money in long term investments, you'll find you are a more patient, and more successful investor.

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Donald Steinmann and Advanced Financial Management assume no responsibility for any actions taken due to comments made in The Investment Tip of The Week.

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"A good decision is based on knowledge and not on numbers."
-- Plato