While there are many who have made millions investing, there are also countless people who have lost it all, as well as many in between. Understanding and accepting these risks is one of the first steps of investing and developing an effective investment plan.
One of the first steps should be to determine what your goals are and how investing can help meet these goals. To this end, for a twenty year old, fresh out of college, the goal may be to have enough money to retire comfortably, so a more long-term and safer approach may be the best choice. If, on the other hand, the goal is to get a new car by next Christmas, a much more aggressive and risk approach would be needed. Determining what type of investing will best match these needs and what level of risk is acceptable is the first step to investing.
As is often the case with many parts of life, a big part of investing is time. Given enough time, it is rare for a stock to not perform considerably better than a similar savings account, but the key phrase here is “enough time.” In these cases, since the investment is intended to be long term, it is okay when there is a dip or recession, as it will eventually work itself out. In most cases, even today’s repressed and scary market will eventually climb, so it is simply a matter of waiting. Of course, with that said, if a recession happens to hit when you are ready to cash in, then you will run into problems, but generally, long term investments pay off better than short-term.
With that said, if the goals are to get a new car by next Christmas, a long term investment will not generally meet this goal. Along the same lines, a long term investment tends to tie up your money for much longer, so if you need to have a more fluid availability to your cash, such as someone who uses it to live off of, a long-term investment might not meet these needs. However, these types of investments are quite risky and can include a number of other costs, such as taxes and trading fees, which can quickly erode smaller returns.
In addition to understanding the importance that time can play while investing, it is also important to understand the distinction between owning versus lending.
When you purchase something, such as when you buy stock in a company, you are basically giving over control of your money to the company and allow they to use it as they deem fit, although most companies do provide a mechanism for allowing their stockholders some control over the business.. However, the flip side is that since you own the stock, you can sell it whenever you want, with few restrictions.
Lending investments, which include things like bonds, usually remove a lot of the control over when you can cash in on your investment. For instance, some bonds have a specific time frame that must be met before the bond can be cashed in. With that said, it is usually possible to sell most bonds, but it is generally not as easily or as straightforward as when you actually own the investment.
About the Author:
Roger, a financial writer, enjoys spending time in Raleigh and the Research Triangle Park. There are many important industries in this area, as well as several collection agencies. When these industries need to preform debt recovery, as well as other services like skip tracing, they turn to Professional Recovery, a
Durham Debt Recovery Agency
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