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No one knows where time will go. As another year draws to a close, it is appropriate to reflect on the nature of time and how it affects us. And time is certainly an important factor in achieving your financial goals.
Time is an investor’s greatest ally. If you hold your investments for the long term, you can potentially achieve impressive growth in cumulative value. Additionally, if you continue to add stocks to these investments, perhaps through a dividend reinvestment plan, you may be able to achieve “growth-based growth” through the power of compounding. Of course, owning stock investments is subject to market fluctuations, but generally speaking, the longer you hold these investments, the less you are exposed to market fluctuations.
However, the time aspect must also be considered in the following situations:
- Check your progress towards achieving your goals – When you set a goal, whether it’s for your child’s education or saving for your own retirement, you know the end date when you’ll need the money, but it’s also important to track your progress along the way. So, each year, check how far you are progressing towards achieving your goals. If you’re behind, you may need to adjust your investment mix.
- Choosing the right strategy – The time required to achieve a goal should drive an investment strategy toward that goal. For example, if you are saving for retirement in less than 30 or 40 years, your portfolio should include the appropriate proportions of stocks and stock-based investments for growth based on your satisfaction level. you need to invest in. Various risks such as interest rate risk, credit risk, and market risk. Keep in mind that the value of your investment will fluctuate, although you may encounter some bumps along the way, and you may lose some or all of your principal. But perhaps there will be time to overcome the “down” period. On the other hand, if you’re saving for a short-term goal like a vacation, a new car, or a wedding, you’ll need a certain amount of money available exactly when you need it. In this case, you may have to sacrifice some growth potential for investments with fixed principal values, such as certificates of deposit (CDs) or bonds.
However, keep in mind that you don’t have to follow only one strategy or the other when investing for long-term and short-term goals. You can save for retirement primarily through growth vehicles, but there’s still room for short-term instruments in your portfolio. And even if you’re specifically investing for short-term goals, you can’t forget about the need to save and invest for retirement.
One last point about the relationship between time and investment. Risk tolerance can and probably will change over the years. As you approach retirement, you may feel the need to adjust your portfolio toward a more conservative approach. That’s because you may want to consolidate the gains you’ve made, recognizing that the time to recover from a down market is short. Still, even in retirement, your portfolio needs some growth potential to stay ahead of inflation.
When investing, one of the biggest considerations is time. Therefore, use your time wisely.
This article was written by Edward Jones for use by Joe Parlavecchio, CFA, CFP®. For more information, please visit https://www.edwardjones.com/joseph-parlavecchio.
Edward Jones, SIPC Member
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