(less than three years)
Because you plan to spend the money you set aside for short-term goals relatively quickly, you’ll want to focus on safety and liquidity rather than growth in your short-term portfolio. Treasury bills (T-bill) backed by the government’s promise to repay are generally considered safe investments.
Liquid investments are those you can sell easily with little or no loss of value, such as Treasury bills and other low-risk investments that pay interest. If those investments have maturity dates, as T-bills do, the terms are very short.
For example, say you’re saving for a down payment on a house that you hope to buy in about a year. If you’ve invested the money in stock funds and your portfolio fell sharply just as you were about to start your home search, you might have to postpone your plans to buy or choose a less expensive home.
On the other hand, if you had given yourself a little more time to accumulate the funds for a down payment and invested them in liquid cash investments or insured bank products such as certificates of deposit (CDs), you could be more confident that the money you need would be available when you were ready to make an offer.
Cash investments typically pay lower interest rates than longer-term bonds—sometimes not enough to outpace inflation over the long term. But since you plan to use the money relatively quickly, inflation shouldn’t have much of an impact on your purchasing power.
Medium-term goals
(three to 10 years)
Choosing the right investments for mid-term goals can be more complex than choosing them for short- or long-term goals. That’s because you need to strike an effective balance between protecting the assets you’ve worked hard to accumulate while achieving the growth that can help you build your assets and offset inflation. Here are possible strategies for managing a portfolio of investments for goals that are three to 10 years in the future:
- If your goal is just three or four years away, you might limit your stock to less than 30 percent of your portfolio. If your goal is eight or nine years in the future, you might invest 60 percent or more in a stock fund. It partly depends on your tolerance for risk. As your goal draws nearer, you can sell some of your stock fund shares and reinvest the assets in cash equivalents, such as a money market account or fund.
- Balance your mid-term portfolio with a mix of high-quality fixed-income investments—such as a mid-term government bond fund. Then monitor the stock investments closely and be prepared to sell to limit your losses if there’s a major market downturn.
- Establish limits for gains and losses in your mid-term stock portfolio. For instance, you may decide ahead of time that you’ll sell an investment if it increases in value 20 percent or decreases 15 percent—or whatever percentage you’re comfortable with. As your goal approaches, you can reinvest your assets in less volatile investments.
Long-term goals
(more than 10 years)
The general rule is that the more time you have to reach a financial goal, the more investment risk you can afford to take. For many investors, that can mean allocating most of the principal you set aside for long-term goals to growth investments, such as individual stock, unit trusts.
While past performance is no guarantee of future results, historical returns consistently show that a well-diversified stock portfolio can be the most rewarding over the long term. It’s true that over shorter periods—say less than 10 years—investing heavily in stock can lead to portfolio volatility and even to losses. But when you have 15 years or more to meet your goals, you have a good chance of being able to ride out market downturns and watch short-term losses eventually be offset by future gains.
In addition, some investors successfully build the value of their long-term portfolios buying and selling bonds to take advantage of increases in market value that may result from investor demand. Others diversify into real estates. The larger your portfolio and the more comfortable you are making investment decisions, the more flexible you can be.
Keeping an eye on the big picture
Setting investment goals and making investment choices is just the beginning. You’ll also want to learn as much as you can about how to evaluate potential investments and keep track of the progress you’re making toward accumulating the money you need to reach your objectives.
That doesn’t necessarily require checking your account every day but it does mean that you should keep an eye on whether the value of your portfolio is increasing from month to month and year to year. It often pays to take a long-term perspective on investing and not be too hasty to switch investments based on short-term results.
But if your investments aren’t delivering the results you had anticipated over a period of time, especially if the financial markets as a whole are doing well, you should be prepared to seek alternatives.
You’ll also want to keep in mind the passage of time. What you initially considered to be long-term goals can become mid-term and short-term goals very quickly. That requires rethinking how your money is invested and whether you should begin to make some changes.
In addition, while some goals are flexible and can be postponed, others have specific dates. For example, many students begin university education at 19 or 20 and need money for tuition at that point, not several years in the future. Other goals are more flexible. You can often wait to buy a home or postpone retiring from your job if that extra time will make it more affordable.
Be prepared for surprises. For example, many people retire earlier than they had planned because their employer downsizes or a company closes its doors.
Since your income, monthly expenses and lifestyle situations are likely to change over time, you should re-evaluate your finances regularly to be sure your expense and investment plan are still meeting your needs.
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