If you are looking to invest, it’s important to know if you are investing for a short-term or a long-term goal. Investors need to consider three fundamental elements when deciding to invest their money: time horizon, goals, and risk tolerance. The time horizon in which you will need to access your money will determine the type of investment best to meet that goal. Money that you will need access to in a very short period of time should not be in the stock market; whereas money that you won’t need for a long time, such as retirement, should be invested in the stock market to take advantage of the potential for greater returns.
How to Invest for Your Short-Term or Long-Term Goals
Short-term goals are generally thought of as goals that you are investing for less than three years. Perhaps you are looking to save for a vacation, a down payment on a car, home improvements, or to buy a new appliance. These short-term goals typically involve amounts of money that you can realistically save relatively quickly. Principle preservation is also of paramount importance, so choosing less risky investments is key.
Long-term goals are usually in place for ten or more years. Money invested for long-term goals has a much longer time horizon and can withstand fluctuations in the stock market. Historically, the U.S. stock market trends higher over time. However, while the overall direction of the stock market is higher, there can be dips and downturns in the short-term that can negatively affect your portfolio. Having time to allow for the market to go up again is critical for obtaining long-term investing goals.
Short-Term Goals
When saving money for short-term goals, it is important to put money in less risky investments that will earn money, but also preserve the principle. Because you are saving for an objective that you need to meet relatively quickly, such as a vacation, a down payment on a car, or buying a new television, you can’t lock your money up into investments with long-term maturities, nor do you want to invest in the stock market, which can be volatile. Even though there is potential for your money to earn more in long-term investment vehicles, you must prioritize principle preservation with less risky investments.
The following are great investment vehicles to help you reach your short-term goals:
Cash Management Accounts
Cash management accounts incorporate features of checking and savings accounts with benefits such as competitive interest rates and little to no fees.
High-Yield Savings
With the rise of online banking, financial institutions have become more competitive by offering high-yield savings accounts, which can pay up to approximately ten times more than a traditional savings account.
Money Market Mutual Funds
Unlike a typical money market, which is an FDIC-insured cash account, money market mutual funds are a basket of investments that hold your money in high-quality, short-term debt instruments, cash, and cash equivalents and are not insured by the FDIC.
Intermediate-Term Goals
Building a rainy day or emergency fund can be done with a mix of cash, and short-to-intermediate-term investments. Because you want to be able to access these funds immediately if necessary, but you are also hoping to allow this money to grow, we will look at some investments to help reach those immediate-term goals.
Certificates of Deposit
Certificates of deposit (CDs) can be very short-term, starting at just a few months and ranging to several years. An investor could choose to have several CDs on a rolling maturation schedule to always have access to cash, and if it is not needed at the time, it can be invested into another CD.
Bond Funds
This type of investment is sometimes called a debt fund because it is an investment vehicle that utilizes bonds of all types–government, municipal, corporate, convertible, and mortgage-backed. Because the main goal of a bond fund is generating monthly income for investors, they are good instruments to provide monthly cash for immediate use.
Long-Term Goals
Long-term investors utilize money that they won’t need for several years, or even decades. When investing long-term, you want to invest with growth in mind, not the day-to-day fluctuations in the market. You want investments allocated across different asset classes, including cash and cash equivalents, stocks, and fixed income. Your exact mix of investments will be dependent upon your time horizon and risk tolerance.
Stocks
Individual stocks can be very powerful long-term investment tools. There is the potential for steady growth in value, as well as growth by dividends. Some companies will issue a cash dividend, while others may issue a stock dividend or additional shares of stock. Shareholders invested for the long-term are likely to see overall growth of the stock price, and with an increased number of shares, making stocks a beneficial long-term investment.
Exchange Traded Funds
Exchange traded funds (ETFs) are much like mutual funds, which are also a basket of investment securities. ETFs typically track a particular index, sector, commodity, or other assets and can be bought and sold on a stock exchange, just like an individual stock.
Mutual Funds
This type of investment is a pool of stocks, bonds, or money market assets and is structured by a money manager to meet the fund investment objectives.
Investors can choose from a variety of funds:
- Income Funds
- Money Market Funds
- Stock Funds
- Bond Funds
- International/Global Funds
- Specialty Funds
- Balanced Funds
For instance, a stock fund would be more suitable for someone with a longer time horizon until retirement; whereas a bond fund would be a more conservative choice for someone nearing retirement.
How to Use a Robo Advisor to Set Goals
A robo-advisor is an account that you can set up and have investments chosen automatically for you in an algorithm-based platform. During account setup, you will answer several questions regarding your investing goals, time horizon, and risk tolerance. Based on those answers, the robo-advisor will choose a mix of investments, often based on modern portfolio theory, that fits the criteria and will rebalance and reallocate your portfolio to stay on target with your selected financial goals. Utilizing modern portfolio theory, investors can create portfolios that maximize return for a specific level of risk.
The best robo-advisor companies make setting up an account a quick and easy process that can be done completely online.
Is Investing Good for Long-Term Goals?
Yes, investing is good for long-term goals, such as planning for retirement or saving to pay for a child’s college education. Having investments and a plan in place for several years can certainly help your money grow and prepare for those types of big expenses in life. Investing for the long-term can help lessen the anxiety of day-to-day market fluctuations. If you don’t need the money for several years, you can ride out the ups and downs of the market.
What Is a Valid Long-Term Investing Goal?
Investing goals will vary from person to person. However, many people will invest long-term to save money to be financially secure in the future. Paying off a house, saving for retirement, and ensuring that you have enough money to pay for your child’s college education are among some of the most common long-term investing goals.
What Are the Best Short-Term Investments?
Short-term investments like Treasury bills, high-yield savings accounts, short-dated CDs, money market accounts, and government bonds offer some of the best interest rates or rates of return over holding periods of less than three years.
The Bottom Line
It is important for your financial well-being that you are able to determine what constitutes short term, intermediate term and long term investing goals. Each type of investment horizon requires a different strategy and set of investments. Some investments that are suitable for your short term horizon are unsuitable for the longer term and vice versa.
