When it comes to investing in stocks, short term generally means one year or less, although some people extend the period to two years or less. Short-term investing isn’t about making a quick buck on your stock choices — it refers to when you may need the money.
Every person has short-term goals. Some are modest, such as setting aside money for a vacation next month or paying for medical bills. Other short-term goals are more ambitious, such as accruing funds for a down payment to purchase a new home within six months. Whatever the expense or purchase, you need a predictable accumulation of cash soon. If this sounds like your situation, stay away from the stock market!
Because stocks can be so unpredictable in the short term, they’re a bad choice for short-term considerations. Market analysts on TV often say things such as, “At $25 a share, XYZ is a solid investment, and we feel that its stock should hit our target price of $40 within six to nine months.”
An eager investor hears that and says, “Gee, why bother with 3 percent at the bank when this stock will rise by more than 50 percent? I better call my broker.” It may hit that target amount (or surpass it), or it may not. Most of the time, the stock doesn’t reach the target price, and the investor is disappointed. The stock can even go down!
The reason that target prices are frequently missed is that it’s difficult to figure out what millions of investors will do in the short term. The short term can be irrational because so many investors have so many reasons for buying and selling that it can be difficult to analyze.
If you invest for an important short-term need, you can lose very important cash quicker than you think.
During the raging bull market of the late 1990s, investors watched as some high-profile stocks went up 20 to 50 percent in a matter of months. Of course, when the bear market hit from 2000 to 2003 and those same stocks fell 50 to 85 percent, a savings account earning a measly interest rate suddenly didn’t seem so bad.
Short-term stock investing is very unpredictable. Stocks — even the best ones — fluctuate in the short term. In a negative environment, they can be very volatile. No one can accurately predict the price movement, so stocks are definitely inappropriate for any financial goal you need to reach within one year. You can better serve your short-term goals with stable, interest-bearing investments like certificates of deposit at your local bank.