Investing for the short v long term
You could be investing to boost your retirement fund. Or you could be looking to build up your finances for a down payment on a house. There are so many reasons why people want to invest — but determining whether your goals are short term or long term is the first step in the planning process.
Whether you’re looking at quick wins or the long haul, there are investment strategies that can help you toward a better financial future.
Do I have enough money saved to cover an emergency fund?
Generally, this fund should amount to around three to six months’ worth of expenses, which can be called upon in the face of things like layoffs or large medical bills.
If you have a healthy emergency fund, and have all of your debt repayments under control, you can start thinking about your investing goals, and whether you’re looking at the short or long term.
What are your investment goals?
Everyone has investment goals, whether they be a new car, a new home, or a comfortable retirement.
Typically, these goals are influenced by three factors: age, income and outlook.
Of course, these factors can intersect, since your age can often be an indicator of which income bracket you may fall under.
But all three in their own right can have a tangible impact on what your investment goals look like.
The earlier in life you’re able to figure out your investment goals, the better chance you have of setting the groundwork to achieve them — and dealing with the inevitable financial challenges that life brings.
However, it’s never too late to start planning — or investing.
You’ll simply have to map out your investment goals accordingly.
Long term vs short term investments
The one-year time frame is a good indicator of whether you’re looking to make short- or long-term investments.
Generally, short-term investments are held for less than 12 months, while long-term investments are held for more.
There are cases to be made for both, but the decision fundamentally comes down to why you are investing.
Short-term goals should aim for a low level of risk and a high level of security, to ensure you don’t lose any money when you need to cash in on your investment.
However, stability means there isn’t much room for profit. Low risk generally means low returns – but the alternative is to accept high levels of risk, which could leave you without profit and even operating at a loss.
Long-term investing gives you more scope to take risks, depending on your outlook.
The longer you are willing to invest, then the more opportunities there will be to ride the ups and downs of the market and ultimately come out with a profit.
The downside, of course, is that you have to leave your investment alone for an extended period — and depending on your age and income, you might not have that luxury.
The earlier in life you’re able to figure out your investment goals, the better chance you have of setting the groundwork to achieve them
Short- to medium-term investment options
Since many experts suggest saving rather than investing is the best way to shore up your finances in the short term, there are various options that are low in risk.
High-yield savings accounts and CD ladders
Saving is key to your short-term goals, which is why a high-yield savings account can be a good option.
Plus, many online banks offer annual percentage yields of around two per cent, so you will make some profit while building on your savings.
Meanwhile, you may make more money by using a certificate of deposit (CD) to your advantage.
Rather than just one, you can set up several CDs that have varying maturity dates, which will keep your cash accessible while taking advantage of their yields.
Short-term bond and fixed income funds
If your investment planning is looking more towards 18 months than a year, then placing your money in fairly stable short-term investments could be a good way of steadily building on your income.
Short-term bond and fixed income funds are both fairly risk-averse ways of pursuing this strategy, as they will limit risk and minimize losses in a down market.
Structured notes can pay interest for as much as six per cent in interest.
However, the note should be held to maturity since it can be challenging to sell once it has been issued.
The terms of a structured note can be complex, but a financial advisor like Unbiased can offer guidance on the process.
Long term investment options
401(k)s and IRAs
If your long-term plans have you thinking about retirement, then 401(k)s and IRAs will likely be a part of that plan.
They are both tax-favored accounts, and are one of the best ways of ensuring that you are financially comfortable once you finish working.
401(k) plans often come with the added bonus of worker contributions, while retirement accounts like IRAs will reduce the amount of tax you’ll need to pay on your hard-earned cash.
Higher education can be very costly, so building up a fund for a younger family member to attend college can be key.
529 plans are a great way of doing this if you’re investing over a lengthy period.
While they offer tax-exempt withdrawals for qualified education expenses, some states also allow residents to deduct contributions from their state income taxes.
With a target-date fund included in many 529 plans, as an investor you can alternate between aggressive and conservative investing depending on how close you are to your financial target.
However, it’s worth noting that 529 plans can lose money in a down market.
Index funds and ETFs
If you have the time and the funds, then long-term investing strategies of index funds and ETFs are a great way of helping you attain goals like buying a house or starting a business.
These investment accounts offer low fees and great value, and contain plenty of securities that will allow you to spread out the risk.
However, you should undertake plenty of research before investing in any particular fund.
Financial advisors can offer sound advice on where you should put your money, depending on your personal financial situation.
The benefit of expert advice
Whatever steps you’re looking to take with your investments, expert financial advice can help you to establish clear goals and tangible ways of reaching them that will suit you.
Financial advisors will have a firm grasp of the markets and the varying strategies for investment.
But more than this, they’ll be able to curate a plan for you, wherever you are in your financial journey, and help you to build your wealth in a way that works for you.
Kate has written for leading publications and blue chip companies over the last 20 years.