Are You Investing for the Long Term?

Written by: Scott Sery

Investing for the long term in a way that meets your risk tolerance is essential to meeting future financial needs.  Unless you choose to invest US Treasury bonds or keep your money in your FDIC insured checking account, investments carry some risk to them.  While a savings is often FDIC insured and guaranteed not to lose value, an investment is only insured against fraud on the part of the broker.  The trade off is the potential for better returns than what a savings account can offer.

When a person puts money into a savings account, they are giving it to the bank for safe-keeping.  The bank gives them a rate of return in exchange, but then takes the money they have received and lends its to businesses and individuals in the community or it invests it in treasury bonds other government securities.  Typically, funds deposited in savings accounts at FDIC-insured banks have no risk and are highly liquid.

The risk of losing value is what makes the investment pay more than the savings account.  The riskier the investment, the higher the potential returns.  For example, government issued bonds are the safest place a person can invest their money.  Unless the government collapses completely, there is very little risk that the government will not make the promised interest payments or repay the borrowed amount in full at maturity.  Because of their low risk, US government bonds pay a relatively low interest rate.  On the other end of the spectrum there are individual issues of stock in a new startup company.  The shares may become worthless if the company fails.  However, If the company takes off, the share price could appreciate dramatically.

You should assess your risk tolerance (this can be done with one of many online quizzes, or with the help of an advisor).  The more aggressive the score, the more stocks (equities) a person will want in their portfolio.  The more conservative, the more bonds (fixed income) they will want.  These investments can come in many different forms.

Stocks and bonds are the underlying part of almost all investments.  But many people choose not to invest directly in them.  If a person were to buy one stock, and the company failed, they would lose all of what they had invested.  Instead most people put their money in mutual funds.  Each mutual fund is comprised of many different individual issues.  And any issue often does not make up more than 1% of the fund.  So if one company fails completely, the value of the mutual fund does not drop significantly.  Mutual funds come in a wide variety of investment mixes, from 100% stock based to 100% US government bond based.  Different fund families have different expenses, so be careful when choosing which one to use.

Investing for long term goals does not have to be difficult.  Automating the deposits into an investment account is just as easy as automating them into a savings account.  With the value of compound interest, dividends, and capital gains, small systematic investments over time can grow to be of significant value.  Just be sure to use established proven investments, and use the services of a trusted advisor to answer the hard questions.


Are You Investing for the Long Term?

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