Consider stocks as tools for living, just like any other investment — no more, no less. Stocks are the tools you use (one of many) to accomplish something — to achieve a goal. Yes, successfully investing in stocks is the goal that you’re probably shooting for. However, you must complete the following sentence: “I want to be successful in my stock investing program to accomplish _______.” You must consider stock investing as a means to an end. When people buy a computer, they don’t (or shouldn’t) think of buying a computer just to have a computer. People buy a computer because doing so helps them achieve a particular result, such as being more efficient in business, playing fun games, or having a nifty paperweight (tsk, tsk).

Know the difference between long-term, intermediate-term, and short-term goals and then set some of each. Long-term is a reference to projects or financial goals that need funding five or more years from now. Intermediate-term refers to financial goals that need funding two to five years from now, while short-term goals need funding less than two years from now. Stocks, in general, are best suited for long-term goals such as these:

• Achieving financial independence (think retirement funding)
• Paying for future college costs
• Paying for any long-term expenditure or project

Some categories of stock (such as conservative or blue-chip) may be suitable for intermediate-term financial goals. If, for example, you will retire four years from now, conservative stocks are appropriate. If you’re optimistic about the stock market and confident that stock prices will rise, then go ahead and invest. However, if you’re negative about the market (you’re bearish, or you believe that stock prices will decline), you may want to wait until the economy starts to forge a clear path.

Stocks generally aren’t suitable for short-term investing goals because stock prices can behave irrationally in a short period of time. Stocks fluctuate from day to day, so you don’t know what the stock will be worth in the near future. You may end up with less money than you expected. For investors seeking to reliably accrue money for short-term needs, short-term bank certificates of deposit or money market funds are more appropriate.

In recent years, investors have sought quick, short-term profits by trading and speculating in stocks. Lured by the fantastic returns generated by the stock market in the late 1990s, investors saw stocks as a get-rich-quick scheme. It is very important for you to understand the difference between investing, saving, and speculating. Which one do you want to do? Knowing the answer to this question is crucial to your goals and aspirations. Investors who don’t know the difference tend to get burned. Here’s some information to help you distinguish among these three actions:

• Investing is the act of putting your current funds into securities or tangible assets for the purpose of gaining future appreciation, income, or both. You need time, knowledge, and discipline to invest. The investment can fluctuate in price, but has been chosen for long-term potential.
• Saving is the safe accumulation of funds for a future use. Savings don’t fluctuate and are generally free of financial risk. The emphasis is on safety and liquidity.
• Speculating is the financial world’s equivalent of gambling. An investor who speculates is seeking quick profits gained from short-term price movements in that particular asset or investment.

These distinctly different concepts are often confused even among so-called financial experts. I know of one financial advisor who actually put a child’s college fund money into an Internet stock fund only to lose over $17,000 in less than ten months! This advisor thought that she was investing, but in reality, she was speculating. I know of another advisor who told a client to avoid savings accounts altogether because the client had a 401(k) plan. This particular advisor didn’t catch the crucial difference between “saving” and “investing.” The client eventually found out the difference; his 401(k) fell by 40 percent when the bear market of 2000 arrived.

Fortunately, we can learn from these situations and get back on track. That child that lost the $17,000? He is my neighbor and I helped the father to reinvest the remaining funds. The portfolio doubled in value by the following year. It is still growing. The second fellow that lost 40 percent in his 401(k) account? He became my student and he has recouped his losses and his 401(k) plan is up (this occurred within two years). As of 2005, both investors have portfolios that are beating the general market.