Successful Investments Require Long-Term Planning

While many of us are short-sighted when it comes to investing, it is not the short-term performance that really matters. Long-term planning, on the other hand, is where the pay off comes as could be seen in the October 1987 ripple that sent the Dow Jones plummeting 513 points or 2.2 percent in a single day. If you were an investor at that time you may remember the world-wide panic that event caused, devastating markets from the U.S. to Japan to Germany causing many people to believe that the day of stocks was over and metals was the only safe investment.

This panic was caused by a lack of perspective on the part of short-term investors and it cost them all their gains and more but the long-term investor saw this as merely a market readjustment and gained 5 percent on their investment by the end of 1987.

One of the reasons for this short-sighted concept on the part of the consumer is the media’s one-day perspective on everything. Every event, financial or otherwise, is reported without any historical perspective to alleviate viewers’ fears of catastrophe. Once you realize that the media is only concerned about filling its allotted one-hour of news time with dramatic, attention-getting information things begin to come into clearer focus. However, it is not only the media that tend to cause investors to worry since brokers and money managers, dependent on investors buying and selling stocks are prone to encourage dumping stocks unnecessarily to increase their profits.

For long-term investors, a mutual fund is one of the safest investments but it may not be for the short-term investor since they may invest in one of the fund’s high days only to see it drop in the upcoming month. If they pull out, then they will lose their investment but if they can be patient for the long-term they could see a nice profit at the end of a five-year period. In other words, one can generally assume that the shorter the investment the riskier it is and the longer the investment period the lower the risk. However, the older you are, the shorter the investment period will need to be since it would not be logical for a 90-year-old to invest in a 15-year term fund since chances are he will not be able to collect on it. A younger investor though could easily invest in a 20 or 25-year fund with the intention of cashing it in for retirement at a later time.

So basically, the general advice I have found suggests that any investor consider their age at the time of the investment and then choose as long-term an investment as they can to receive the best gain on that investment.

[tags]financial planning, long-term investments, Mutual Funds, Short-term investments, stock market, retirement planning[/tags]

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  • microman

    Asset allocation is truly the most important factor in building retirement investments but so many people shoot from the gut and think short term. Right now everyone is hot but cooling on real estate and their wounds from the stock downturn are still fresh. So many people who should be in stocks(index funds for example) are sitting there in CDs and money market accounts. If you’ve got 15 years or more, I say go SPY all the way. Your article touches on the need for long term planning but the other aspect that needs to be accounted for is emotion. How do you think people can get past the fear of risk they’ve built over the past 5-10 years?

  • reflections

    Dear Microman

    First I guess I think of investments as always being somewhat of a risk. It is just that long-term investments are ususally much safer.

    To overcome the fear one must just hop back on the horse so to speak and make careful and well-considered choices of which stocks/bonds to purchase. I would think that investments in medical or pharmaceutical companies for example would be relatively safe as long as you choose a company that has a proven track record.

    Government bonds are also usually a safe investment and go up if stocks go down and visa versa.

    I hope that answers your question. Have a nice day. Jackie