Are Long Term Investments Worth the Risk?
If you have ever considered a long term investment, you may have encountered a very disconcerting line that read something like this: gains are not guaranteed and losses are possible. Many new to the investing game trip on this little clause and never start. To ensure that this isn't you, read this guide to become more comfortable with the idea of long term investing.
Do you want to start an IRA (Individual Retirement Account), 401(k) plan, or drop some money in a CD (certificate of deposit)? Although there are millions of permutations of these investments, they are all essentially similar. They all involve a relatively long period of investment for a modest to moderate guaranteed or variable interest rate. Is loss possible? Yes, it is. In fact, with the IRA and 401(k) plans, it is important to carefully manage your portfolio to minimize loss at that all-important time for you: retirement.
IRAs involve a yearly contribution which, in 2012, was limited to $5,000 (not including catch-up contributions). CDs and 401(k) options allow unlimited contributions (depending upon the terms of the account), so check with your employer and bank about which option is best for you.
Most long term investment plans depend upon diversified indices created and purchased by whoever administrates the fund. Depending upon the level of volatility you accept, you could be purchasing company stock, mutual fund items, or other financial devices. All of this is explained in a yearly prospectus (a catalog of fund investments).
Although long term investments do not have religious implications, a Biblical parable exists that highlights the lesson of whether investing is a good idea. As the story goes, three men were given different quantities of money (1 talent, 5 talents, and 10 talents). The two with a greater amount invested their The master was happy with the other two on his return, but very angry with the one who did not invest.
This parable highlights an important fact about money: it is never static. It holds value, but its purchasing power is constantly being affected and decreased by inflation. So, keeping it under your mattress is not a good plan. Instead, exposing it to the market and allowing it to be used by others (in return for interest) keeps it engaged and earning more money.
Keep this in mind: volatile investments have more highs and lows, but they also can have a greater long term reward. You'll want to start to move your funds out of riskier items as you approach retirement, but fluctuation is not a bad thing as long as you don't worry that you're losing your money and sell at a low value. This converts your paper losses into real losses, and is the worst move possible.