In today’s climate of instant gratification, waiting for water to boil can seem to take forever. With a distorted perception of time, how can an investor determine when to invest for the long-term or short-term?
Generally “long-term” refers to anywhere from five years and beyond, while “short-term” refers to a period of six months to two years. If you’ll need access to your funds sooner than that, stay in cash.
The philosophy behind designing a long-term program is that the account’s value fluctuates over time. Since you don’t need the assets this year, or even next year, any short-term ebb won’t negatively affect your goals. Hopefully, over the years the total value will increase. Professionals generally favor buying stocks for long-term portfolios, since the stock market has historically grown. (Remember past performance is not a guarantee of future returns.)
Short-term investors intend to use their money soon for something like a home purchase, a wedding, or a tuition bill. Therefore, a typical short-term investment portfolio usually consists of relatively secure investment vehicles such as bank accounts, CDs (certificates of deposit), or money market funds.
Correct labeling is essential
If you’re a long-term investor, act like one. While it’s difficult to ignore a market drop, resist the temptation to just sell without examining your financial plan. Don’t let the emotional turmoil of the market disturb your long-term goals.
One client insisted that he was in the market for the long-term and created a well-diversified account designed not to be touched for seven to ten years. Six months later, he compared his return to the year-to-date return to some foreign market and called to sell out his whole account and switch directions.
“What about your long-term plan?” I asked. He said the plan was fine, but in the half year since he started other investments had done better. Clearly, he lacked the discipline and patience necessary to be a real long-term investor.
Be honest. Are you a long-term or a short-term investor? This is an important distinction that that cannot be ignored. For more about sticking to your investment goals read, click here.
Douglas Goldstein, CFP®, is the Director of Profile Investment Service, Ltd., which specializes in helping people who live in Israel with their US dollar assets and American investment and retirement accounts. He helps olim meet their financial goals through asset allocation, financial planning, and using money managers.
Published September 2, 2012. Updated August 2019.