- A Guide to Short Term Investing
When looking at ways to put your money at work, it’s important to consider your time horizon as an investor. Investments meant for short-term goals requires taking a different strategy compared to investments for long-term goals. Short-term goals are defined as 3 years or less while long-term is meant for goals such as your child’s future education or your retirement.
Although most investment plans are designed in a way that they grow the wealth of an investor over an extended time period, the might be occasions where there’s only a limited amount of time to reach a goal, such as when saving for a down payment on a house.
How to Position your Money for the Short-run
Within the 3 years or even less, your specific horizon will influence the types of assets you can consider, and the apt amounts of risk you can take. For instance, an individual who needs the money within three months will be better suited by a portfolio of mostly cash investments, while one who doesn’t need the money within 3 years has a much higher flexibility to consider a wider array of investment options.
Below are 3 guidelines to consider if you choose to invest over a short-term investment horizon:
Simplify, and Focus on Reducing Risk
Since you’re working with an abbreviated period, it’s vital to reduce the level of risk in your portfolio of investment plan. A market or business cycle usually last for more than 3 years, meaning you don’t have enough time to recover from a loss that could occur if you chose the higher risk assets like equities and derivatives.
For illustration, let’s consider the equity market correction dubbed, “the dot-com crash of 2000-2002.” On 1/1/2000 the S&P 500 had a starting value of 1,425.59 and closed at 895.84 on 1/1/2003, incurring a loss of 63%. From that point onwards, it took about 4 years to recuperate its original value, reaching a value of 1,424.16 on 1/1/2007.
Although the example highlights one of the most prominent cases of a market correction, the lesson we can learn from it is that with only 3 years to invest, investments in the highly volatile assets like equities can potentially lead to unwanted outcomes.
It may also be beneficial to reduce the complexity of assets on your portfolio. For instance, the non-U.S. assets are greatly exposed to the movements of foreign currencies, which adds a whole layer of uncertainty that is absent in U.S. assets.
Consider the Short-term Instruments
Cash is a highly desirable asset for managing liquidity and risk, and is definitely appropriate when dealing with short time horizons. In the fixed income universe, securities that have less then 3 years to maturity, like the short-term bond funds, might be a great consideration.
Synchronize your Assets with your Goal Timing
If you have a known time horizon, such as 12 months, 18 months, or 3 years, you should ideally invest in assets that will align with your short investment horizon. Check out the following examples:
If you want to save for a down payment of a house that’s due in 6 months, you should be looking for assets that have a duration of 6 months. When you have the down payment of a bought item that’s due in 6 months, and the remainder is to be paid in 12 months, you should look for products that have a varying duration of 6 to 12 months. If you want some help, then Wealth Management London can offer advice.
Ensure your Investment Strategy Works for You
When you’ve finalized your investment plan, you need to consider some additional factors with regards to the implementation depending on the kind of investment products you used. Your financial adviser can develop a plan aligned to your short-term goals, while accounting for a broader view of your overall investment strategy.