Sprint or stroll, depending on your goals
Different investors have different goals. Use short-term investments for short-term goals, such as current income. Savings accounts and money market funds are generally considered short-term—they pay interest or dividends on the money you contribute, and the risk of losing money is low.
Use long-term investments for long-term goals, such as saving for retirement. Stocks and bonds— and the mutual funds that invest in them—are considered long-term and intermediate-term investments, respectively. Generally, stocks are more volatile than bonds, which in turn are more volatile than savings accounts and money market funds. That said, stocks also have a history of providing higher returns than bonds and other short-term investments over time.
In the real world, investors have both short and long-term goals. That’s why choosing a variety of investment options can help you meet your various goals while lowering your risk exposure. This process is called diversification, and it can help you in your race to financial security.
Diversification: a smart choice
Stock mutual funds can provide growth, but they generally don’t produce much income. Bond funds are the opposite. They produce income and may also provide some growth over time. A well-diversified portfolio usually includes a mix of stock and bond investments, because stocks and bonds often react differently to the same economic and market conditions.
Bonds respond more directly to changes in interest rates while stocks are usually affected by specific market or industry news, as well as developments within the company that issued the stock. By blending a variety of different investments with various characteristics, investors can reduce their overall risk while increasing their potential for greater long-term results.
* The returns in the above chart are hypothetical and do not reflect the actual returns of any of the Funds in Ariel Investment Trust or any other investment product.