Consider stocks as tools for living, just like any other investment — no more, no less. Stocks are among the many tools you use to accomplish something — to achieve a goal. Yes, successfully investing in stocks is the goal that you’re probably shooting for. However, you must complete the following sentence: “I want to be successful in my stock investing program to accomplish __________.”
You must consider stock investing as a means to an end. When people buy a computer, they don’t (or shouldn’t) think of buying a computer just to have a computer. People buy a computer because doing so helps them achieve a particular result, such as being more efficient in business, playing fun games, or having a nifty paperweight (tsk, tsk).
Know the difference between long-term, intermediate-term, and short-term goals, and then set some of each.
Long-term goals refer to projects or financial goals that need funding five or more years from now.
Intermediate-term goals refer to financial goals that need funding two to five years from now.
Short-term goals need funding less than two years from now.
Stocks, in general, are best suited for long-term goals such as these:
Achieving financial independence (think retirement funding)
Paying for future college costs
Paying for any long-term expenditure or project
Some categories of stock (such as conservative or large cap) may be suitable for intermediate-term financial goals. If, for example, you’ll retire four years from now, conservative stocks can be appropriate.
If you’re optimistic (or bullish) about the stock market and confident that stock prices will rise, go ahead and invest. However, if you’re negative about the market (you’re bearish, or you believe that stock prices will decline), you may want to wait until the economy starts to forge a clear path.
Stocks generally aren’t suitable for short-term investing goals because stock prices can behave irrationally in a short period of time. Stocks fluctuate from day to day, so you don’t know what the stock will be worth in the near future. You may end up with less money than you expected.
For investors seeking to reliably accrue money for short-term needs, short-term bank certificates of deposit or money market funds are more appropriate.
In recent years, investors have sought quick, short-term profits by trading and speculating in stocks. Lured by the fantastic returns generated by the stock market in the late 1990s, investors saw stocks as a get-rich-quick scheme.
It’s very important for you to understand the difference between investing, saving, and speculating. Which one do you want to do? Knowing the answer to this question is crucial to your goals and aspirations. Investors who don’t know the difference tend to get burned. Here’s some information to help you distinguish among these three actions:
Investing is the act of putting your current funds into securities or tangible assets for the purpose of gaining future appreciation, income, or both. You need time, knowledge, and discipline to invest. The investment can fluctuate in price, but it has been chosen for long-term potential.
Saving is the safe accumulation of funds for a future use. Savings don’t fluctuate and are generally free of financial risk. The emphasis is on safety and liquidity.
Speculating is the financial world’s equivalent of gambling. An investor who speculates is seeking quick profits gained from short-term price movements in a particular asset or investment. (In recent years, many folks have been trading stocks [buying and selling in the short term with frequency], which is in the realm of short-term speculating.)
These distinctly different concepts are often confused, even among so-called financial experts. One financial advisor actually put a child’s college fund money into an Internet stock fund, only to lose more than $17,000 in less than ten months!
