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Sunday, June 3, 2012

Don't Count on Stocks for Short Term Goals

Over the short-term, stocks can be battered or buoyed by any number of market-changing events. Announcements about inflation, interest rates and other economic news – good or bad – can push the market up or down.

World and domestic events can also have a negative or positive influence on the market.

None of these events are within the control of companies or investors. Good, financially-strong companies can watch their stock fall with the rest of the market or their sector through no fault of their own.

This is why stocks are not appropriate investments for people who will need access to their money in the near future. Volatility can shrink your investment at just the time when you need to cash out.

Savvy investors know that stocks are for the long run and are willing to watch the day-to-day fluctuation knowing that good stocks will prove their worth over time.

As you approach the time when you will need to cash out of stocks, you should begin shifting assets into more secure investments such as fixed income instruments like bonds, bank FDs or other more stable products.

A good rule of thumb is to begin the transition from stocks to more stable products when you are two to three years away from needing the money. Use your good sense and judgment on when to begin the transition.

If you don’t have to move all your cash out of stocks at once, you can stagger the transition over a period of months and years.

Don’t let yourself be trapped in the situation of needing a big gain in your stocks at the last moment to reach a financial goal. This risky behavior may make achieving your goal out of reach if the market moves against you.

Its always wise to invest in equities for medium to long term i.e for atleast 2 to 5 years and if stocks performs well in short span of  time and you believe that valuations are stretched, you can get out of the stock early as well. But if you are looking to make quick bucks than do not get into equities, as you are not investing, you are gambling without giving sufficient time to your stock to perform.