People invest for a wide variety of reasons. The most common reason people invest is to save for their retirement. Most people want to stop working at a certain age, in order to enjoy the last years of their life without the stress of going to work every day. The only way its possible for people who are not independently wealthy (by an inheritance or a business that will operate without the owners input, for example) is to have money saved that can be used to pay expenses and entertainment costs once a person retires.
The other common reason why people invest their money is to reach a certain short-term financial goal.
Investing for Short Term Goals
While most people first think of retirement and long term investing when they think of investing, there are many instances when investing also includes short term goals. Buying a new vehicle, going on your dream vacation or purchasing a new home are all examples of short term investment opportunities.
Short term investing requires different strategies than long term investing, which makes understanding your investing purpose all that much more important!
If your idea is to have another income stream to supplement your salary, or to help you purchase items you dont have the cash saved to buy, your investment portfolio should contain a mix of short and long term investments that pay dividends. It should contain low risk, high yield bonds.
If your investment purpose is to save for a specific purchase- perhaps your dream home or to take a vacation, it helps to know how much the purchase will cost and when you need the money. Armed with that information you can develop a strategy for investing.
Short term investments are known to be more challenging than long term investments, particularly if youre not starting out with large amounts of money. Short term investments tend to carry higher levels of risk; but they also have the greatest possibilities for high returns.
Investing for Long Term Goals
The earlier you begin investing for retirement, the higher the amount of money you can create. Young investors can take advantage of compound interest, and even choose riskier investments that could result in higher returns because they have so much longer to recover from a loss than a person who is closer to their retirement age.
As you get closer to your retirement years, your long term investing strategy should contain much less risky investments- including bonds and securities, to help minimize your risks for losing your investment. The lower risk investments have lower rates of return, but should steadily increase.
Retirement investment portfolios typically contain a mix of various stocks, bonds, debt securities, index funds and money markets. Company sponsored retirement plans are great, particular those that match your contributions. It helps you build your nest egg a little faster and stretch your own investment dollars further.
As you age and get closer and closer to retirement, you should move your investments into guaranteed investments (like high interest savings accounts that are insured by the FDIC) to preserve your money so you know its there when you need it!