When you think about investing, you probably think about putting money away for the future — 20, 30 or 40 years from now. It’s true that investing is a wise way to grow your wealth over the years and help you meet big financial goals like sending your kids to college or funding your retirement.
However, it can also help you save for short-term goals — those things you’d like to have money for within the next 10 years. Such goals could include making a down payment on a house, paying for a wedding or funding the vacation of your dreams.
When you invest for the long term, you can afford to take more risks with your money because you have more time to recover from market downturns. But when you’re investing for the short-term, you’ll want to play it safer. You don’t want to save diligently for your kids’ college or your dream wedding only to have the market tank a few months before your goal date, leaving you with nothing. More secure vehicles for short-term investment include money market funds, bank loan funds, bonds and CDs. If you’re investing for a goal that is three to 10 years in the future, you may to add some stocks to your portfolio.
Creating a Short-Term Investment Strategy
You should focus on two things when investing for a short-term goal — security and liquidity. Your money needs to be both safe and easy to get to. That means you need to invest in short-term vehicles that allow you to easily withdraw your money, and that aren’t subject to the whims of the market. That means bonds and bond funds. You’ll get a lower rate of return on these types of investments, but since you’re going to use the money fairly soon, you won’t have to worry much about inflation.
If you are going to invest in stocks to save for a short-term goal, your goal should be at least five to ten years away. Keep a close eye on your investments so you can move your money if your stock value starts to drop. Decide ahead of time how much money you can stand to lose from your stock investments — 10, 15 or 20 percent, for example — and make a commitment to sell if you reach that threshold. As your goal draws closer, you’re going to want to move your money into more secure investments or even into a savings account.
Certificates of Deposit (CDs)
You’ve probably heard of CDs — most banks sell them. They’re insured by the FDIC, just like bank accounts. Many short-term investors like them because you know exactly how much of a return you’re going to get from a CD — you’re guaranteed a specific rate of interest. However, you must also hold CDs for a specific period of time before you can redeem them, anywhere from 30 days to five years.
Money Market Accounts
A money market account is also insured by the FDIC. It’s like a savings account, but it earns a higher rate of interest. You’re also able to write a small number of checks from it each month — usually no more than six. This makes it one of the easiest investment vehicles for folks who need to be able to access their money whenever they want. Since a money market account earns interest the same way a savings account does, you don’t have to buy shares in it. If you want to buy shares, however, you can invest in a money market mutual fund instead.
Bank Loan Funds
Bank loan funds invest in bank loans funded by corporations. They offer a relatively high rate of return, compared to some of the other options discussed in this article, but they can be risky especially if the economy slows. They may also carry relatively high costs and expense ratios. You’ll also need to plan carefully when you withdraw the money, since you may only be able to get to it once per quarter.
There are several kinds of bonds that can help you reach your short-term investment goals. These include ultra-short bond funds, which invest in Treasury bonds, corporate bonds and mortgage-backed bonds. They mitigate risk by investing in short-term securities, and usually have a term of about six months, so they’re not as vulnerable to interest-rate changes as some bonds.
Short-term municipal bonds are another option. They’re more vulnerable to interest rate changes, and they’re exempt from federal income taxes. If you need a short-term investment with more security, you might consider U.S. Treasury bills, which carry terms of 13 to 26 weeks and are backed by the federal government. They’re as secure as savings bonds, but without the 30-year wait.
Bonds, CDs and money market accounts are all great low-risk ways to invest for short-term goals. If you’re investing in stocks for a goal that’s five or 10 years in the future, watch these investments closely. In any case, be prepared to move your money into a safe and easily-liquidated vehicle as your goal date approaches.