The Importance of Investing with a Goal in Mind

Investing in the stock market can be an exciting and potentially lucrative way to grow your wealth over time. But with endless stocks, cryptocurrencies, and other gimmicky new investment opportunities being promoted daily on social media, it can be tempting to jump on the bandwagon and buy into the latest craze everyone else seems to already know about.

Success in investing, however, hinges on distinguishing between genuine investing and speculative buying. Despite often being used interchangeably, ‘investing’ and ‘speculating’ are distinctively different approaches often yielding very different outcomes. True investing involves buying assets with the expectation of generating meaningful returns over time; this is usually based on the asset's intrinsic value and underlying business fundamentals. Alternatively, speculating involves buying into assets with higher-than-average risks—solely based on market trends or rumors—with the expectation of making above-average short-term profits.

While both methods could result in gains, it is crucial to remember that the risk-return characteristics differ greatly. While long-term investing carries some level of risk, it is generally considered to be a more stable and less volatile approach to building wealth over time. This is because investing typically involves holding assets for longer periods allowing for market fluctuations to even out over time. Conversely, speculating often involves short-term trades that can be highly unpredictable and subject to sudden price movements.

Investing with a purpose goes beyond deciding to invest long-term: it involves having a clear, well-defined reason for putting your money to work. This then allows you to determine the appropriate mix of stocks and bonds your portfolio should have at any given moment. And prior to putting those dollars to work, you should already have an idea of how much your portfolio needs to grow by and how long it takes get it there.

It is also advisable to have multiple investment accounts that serve different purposes. Each account can have its own time horizon and risk profile tailored to the specific goal it is meant to achieve. For instance, you might have a retirement account invested primarily in stocks for long-term growth, a college savings account for your children invested in a mix of stocks and bonds, and a short-term savings account invested in low-risk assets for an upcoming major purchase. It is also completely reasonable to have a separate account dedicated to speculative investments. Doing so allows you to engage in higher-risk trading without jeopardizing your long-term investment goals.

Another key aspect of investing with a purpose is having a diversified portfolio. This means spreading your investments across different types of assets, like stocks, bonds, and real estate, among different sectors and industries. Diversification is important because it helps to mitigate risk and protect your investments from market volatility.

Investing with a clear purpose will also help you be mindful of your investment time horizon. A major financial faux pas is risking funds you may need in the near future by gambling on high-risk assets.

For example, let’s say you're saving for a down payment on a house you plan to purchase within a year. In this case, safety and stability are paramount. And placing these funds in volatile assets, like individual stocks or cryptocurrencies, exposes you to the risk of significant price fluctuations, potentially jeopardizing your home ownership goals.

With a short time horizon, it is generally recommended to invest your money in lower-risk assets such as short-term bonds or a high-yield savings account. While these options may not deliver the high returns associated with riskier assets, they offer competitive interest rates and crucially preserve your principal investment.

When you are investing for a future goal, such as retirement, you have the luxury of time on your side. This longer time horizon allows you to take on more risk in the pursuit of higher returns. In this situation, it may be appropriate to have a larger portion of your portfolio invested in stocks, which have historically provided higher long-term returns compared to bonds or cash. While stocks are more volatile short term, the longer your time horizon, the more time you have to weather the inevitable market ups and downs. Additionally, while diversification is generally a wise strategy, a longer time horizon may allow for a more concentrated portfolio in higher-growth sectors or industries.

In conclusion, it is important to consider both your investment goals and time horizon when developing an investment strategy. If you have a short-term investment horizon and will need your money sooner rather than later, it may be more appropriate to invest in lower-risk assets that offer greater stability and liquidity. On the other hand, if you have a longer investment horizon and can endure greater risk, investing in higher-risk assets such as stocks or real estate may be befitting. By taking a purposeful and informed approach to investing, you can increase the likelihood of achieving your financial goals and avoiding unnecessary financial risks that can knock you off track.

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Malcolm Ethridge, CFP® is the Managing Partner of Capital Area Planning Group based in Washington, DC. He is also the Managing Partner of Capital Area Tax Consultants. 

Malcolm’s areas of expertise include retirement planning, investment portfolio development, tax planning, insurance, equity compensation and other executive benefits. 

 Disclosures:

The information provided is for educational and informational purposes only, does not constitute investment advice, and should not be relied upon as such. Be sure to consult with your legal advisors before taking any action that could have tax and legal consequences.

Investments in securities and insurance products are:

NOT FDIC-INSURED | NOT BANK-GUARANTEED | MAY LOSE VALUE