A-Z of personal finance: L is for long term
A year ago, Benson’s investment in a stock mutual fund was valued at $120,000. Today it has lost more than half of its value and is worth only $58,000. He is devastated and fearful that the situation may get even worse. The money was set aside specifically to pay for his master’s degree in a program scheduled for September 2012. His dilemma is: should he go ahead and cash out of this faltering investment and place the funds in a short-term money market account or should she leave the money where it is in the hope that the market will correct itself by August, when he must pay his school fees?
The hard truth is that Benson’s money should never have been invested in the stock market in the first place, but should have been saved in money market instruments. Unless he has an alternative source of funds, Benson may have to sell enough of his stock investments to pay his school fees or may be forced to defer his plans. As anyone who
has invested in stocks has experienced, when you do not have time on your side, stock market investing comes with significant risk.
What does Long Term Really Mean?
One of the best pieces of investment advice ever given by financial advisors is to look at investing as a long-term activity both in bear markets when prices are falling as well as in bull markets where stock prices are going up. Yet people in the financial world are often accused of never really clarifying exactly what “long-term” means except to say that cash required for immediate needs should not be invested in the stock market. Beyond that, a long investment horizon could mean three to five years, and much longer.
Spread Your Risk and be Diversified.
Whether you have invested for the short-term or the long-term, make sure you have managed your risk with a diversified, well-balanced portfolio. Most investments do not reach their full potential for several years. Usually, within that length of time, long-term investors, especially those who invest in a diversified portfolio, can ride out market volatility without dramatically affecting their ability to reach their goals.
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