Don’t put your short-term savings in stocks and that includes ETFs, and equity mutual funds. If you are saving money to go on vacation, buy a car or a house in less than 5 years then don’t put that money in stocks. Investing in stocks requires a long-term time horizon, generally more than 5 years, and the more the better.
Imagine you are trying to save $5000 towards a vacation, car, or down payment. You don’t need the money till 2 years from now so you invest it in stocks. In 2 years when it comes time to withdraw the money you discover the stocks are only worth $2800. Now what? Do you forgo the vacation, the car, or the new home? In order to avoid this situation any money that you require in less than 5 years should not go into stock (or equity mutual funds). Short-term savings can go in a Guaranteed Investment Certificate (GIC), or Term Deposit, there are lots of financial planning books available to steer you in the right direction. But our focus here is investing in stocks for the long-term.
“Our favorite holding period is forever” – Warren Buffett
In the short-term stock prices are volatile, the prices go up and down all the time. It’s also very time consuming to be watching stock prices every hour and minute of the day. No one can accurately time stock prices therefore you must have a long-term time horizon when it comes to investing in stocks.
“Nobody believes in long-term investing more passionately than I do, but as with the Golden Rule, it’s easier to preach than practice” – Peter Lynch
In the short-term stock prices fluctuate, you must have the patience and confidence to avoid selling in a panic. Think long-term and avoid getting greedy or fearful when it comes to buying or selling stocks.
In the long-term history has shown that the stock market provides great returns. This is why RRSP plans and 401k plans are ideal for investing in quality dividend-paying stocks. Steady dividends arriving year after year will add to your portfolio growth, but it does take time. Also steady dividend increases will add to your portfolio but they too will take time. The longer your time horizon the better your stocks will perform. Invest for the long-term and prosper.
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