How to invest in stocks for the future

Are your goals long term or short term? Answering this question is important because individual stocks can be either great or horrible choices, depending on the time period you want to focus on. Generally, the length of time you plan to invest in stocks can be short term, intermediate term, or long term. The following sections outline what kinds of stocks are most appropriate for each term length.

Investing in stocks becomes less risky as the time frame lengthens. Stock prices tend to fluctuate on a daily basis, but they have a tendency to trend up or down over an extended period of time. Even if you invest in a stock that goes down in the short term, you’re likely to see it rise and possibly go above your investment if you have the patience to wait it out and let the stock price appreciate.

Focusing on the short term

Short term generally means one year or less, although some people extend the period to two years or less. You get the point. Every person has short-term goals. Some are modest, such as setting aside money for a vacation next month or paying for medical bills. Other shortterm goals are more ambitious, such as accruing funds for a down payment to purchase a new home within six months. Whatever the expense or purchase, you need a predictable accumulation of cash soon. If this sounds like your situation, stay away from the stock market!

Because stocks can be so unpredictable in the short term, they’re a bad choice for short-term considerations. I get a kick out of market analysts on television saying things such as, “At $25 a share, XYZ is a solid investment, and we feel that its stock should hit our target price of $40 within six to nine months.” You know that an eager investor hears that and says, “Gee, why bother with 3 percent at the bank when this stock will rise by more than 50 percent? I better call my broker.” It may hit that target amount (or surpass it), or it may not. Most of the time, the stock doesn’t reach the target price, and the investor is disappointed. The stock could even go down! The reason that target prices are frequently (usually) missed is that the analyst is one person and it’s difficult to figure out what millions of investors will do in the shortterm. The short-term can be irrational because so many investors have so many reasons for buying and selling that it can be difficult to analyze. If you want to use the money you invest for an important short-term need, you could lose very important cash quicker than you think.

Short-term stock investing is very unpredictable. You can better serve your short-term goals with stable, interest-bearing investments (like Certificates of Deposit at your local bank).

During the raging-bull market of the late 1990s, investors watched as some high-profile stocks went up 20 to 50 percent in a matter of months. Hey, who needs a savings account earning a measly interest when stocks grow like that! Of course, when the bear market hit from 2000 to 2003 and those same stocks fell 50 to 85 percent, a savings account earning a measly interest rate suddenly didn’t seem so bad. Stocks — even the best ones — fluctuate in the short term. In a negative environment, they can be very volatile. No one can accurately predict the price movement (unless you have some inside information), so stocks are definitely inappropriate for any financial goal that you need to reach within one year.

Considering intermediate-term goals

Intermediate term refers to your financial goals that you plan to reach within five years. If, for example, you want to accumulate funds to put money down for investment in real estate four years from now, some growth-oriented investments may be suitable.

Although some stocks may be appropriate for a two- or three-year period, not all stocks are good intermediate-term investments. Different types and categories of stocks exist. Some stocks are fairly stable and hold their value well, such as the stock of much larger or established dividend-paying companies. Other stocks have prices that jump all over the place, such as the stocks of untested companies that haven’t been in existence long enough to develop a consistent track record.

If you plan to invest in the stock market to meet intermediate-term goals, consider large, established companies or dividend-paying companies in industries that provide the necessities of life (like food and beverage or electric utilities).

Preparing for the long term

Stock investing is best suited for making money over a long period of time. When you measure stocks against other investments in terms of five to (preferably) ten or more years, they excel. Even investors who bought stocks during the depths of the Great Depression saw profitable growth in their stock portfolios over a ten-year period.

In fact, if you examine any ten-year period over the past 50 years, you see that stocks beat out other financial investments (such as bonds or bank investments) in almost every single ten-year period when measured by total return (taking into account reinvesting and compounding of capital gains and dividends)! As you can see, long term planning allows stocks to shine. Of course, your work doesn’t stop at deciding on a long-term investment. You still have to do your homework and choose stocks wisely because, even in good times, you can lose money if you invest in companies that go out of business.

Because you can choose between many different types and categories of stocks, virtually any investor with a long-term perspective should add stocks to his investment portfolio. Whether you want to save for a young child’s college fund or for future retirement goals, carefully selected stocks have proven to be a superior long-term investment.