Tailor your investments to short- and long-term goals

You have heard the virtues of investing: ''A dollar invested today can earn you many more tomorrow.'' You've heard tales of your friends and neighbors getting rich by investing in this stock or that mutual fund. Now that you have a little bit of money left over to invest, how do you choose your first investments?

Well, it all has to do with what you are investing for. What do you plan to do with the money you invest? What are your goals, and when do you want to reach them?

As you think that through, bear in mind that investments are tailored to different events in your life, just as your wardrobe is designed for different occasions. (You're obviously not wearing that strapless red number to Aunt Martha's brunch.) Also like clothing, investment ''outfits'' must fit your personal dimensions, such as your financial status and your age.

Take These Measurements

So before you ask an expert, ''What should I invest in?'' ask yourself these two questions:

  • What occasion am I investing for? Is it for a down payment on a house I'm shopping for now or for my own retirement?
  • When will I need the money? In 10 months or 20 years?

Once you've taken those measurements, you'll be able to go to the Great Investing Closet and pick out just the right outfit to suit your investing needs.

To help you in this process, consider that you're probably investing for two types of events: short-term and long-term.

Short-term events are those for which you require money relatively soon--within months or a year or so--such as making a down payment on a house, buying a car or paying school tuition. Long-term events are farther away -- your retirement years or your young children's college education.

So where to invest?

Money Market Funds

For the money that you are planning to cover your short-term needs, you want a vehicle that is SAFE and EASY TO GET TO. (Was that emphatic enough?) A checking account is of course safe and easy, but your money will earn little or no interest there.

The normal recommendation is to put your short-term investments in a money market mutual fund. This is an extremely safe way to earn interest on money that you are essentially storing for a near-term occasion.

Although not insured by the Federal Deposit Insurance Corporation (which insures your bank deposits up to $100,000), a money market mutual fund is otherwise quite similar to a checking or savings account. You can withdraw your money at any time (although there may be restrictions on how many checks you can write in any given month), and you can close your account at any time. But you will receive a higher return for your money than with a checking account. Based on today's rates, a money market mutual fund will yield 5 percent to 6 percent annually depending on where you invest it. You'd be hard-pressed to find that in a checking account, which will pay either no interest or as little as 1 percent annually.


Stocks and Stock Funds

Now when it comes to your long-term goals, the best place to invest is in stocks or stock mutual funds. They simply offer a much better opportunity for your money to grow than bonds or money market mutual funds. And since you won't need your money tomorrow or next year, you can withstand a little risk on this money as the stock market moves up and down.

Yes, stock market investing involves risk, as the market turmoil of 2000 has shown. But historically, stock ownership has been the most lucrative way to invest. Just look back to the year 1926 and pretend you made a long-term bet on the market then. Say you invested $1,000 in large-company bonds and $1,000 in large-company stocks. By 1998, the bond investment would have grown to $57,939 while the stock investment would have grown to $2,087,107. That's 35 times more. And that would have included all the stock-market disasters: the crash of 1929, the Great Depression, the bear market of the 1970s and the crash of 1987. Of course you would have had to keep your composure while all around you people fled the market. But stocks still would have been the way to go.

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