When making investment decisions, one of the most critical elements to consider is your time horizon. Achieving short-term goals, defined here as three years or less, may require a different approach to long-term goals, such as retirement or financing a child's future education.
While many perry financial services are designed to grow over long periods of time, there may be times, like saving for a down payment on a house, when there is only a short period of time to reach a goal.
How to position short-term investments
Even within a period of three years or less, your specific time horizon can provide guidance on the types of assets to consider, as well as the appropriate levels of risk to take. For example, a portfolio with easily accessible cash investments may be more suitable if you need the money in three months, while someone who does not need the money for three years may have the flexibility to consider a wider range of investment options.
Here are three guidelines to think about when investing in a short time horizon:
1. Determine your level of risk
Given such a short time frame, it is wise to reduce the level of risk in an perry financial services investment plan or portfolio. A trading or market cycle typically lasts more than three years¹, so there is typically not enough time to recover from a loss that can occur if you choose riskier assets, such as stocks.
To illustrate, a recent stock market correction occurred during the "dot.com" crash when the S&P 500 Index fell more than 35% from 2000-2002 and did not fully recover until 2006.
The lesson learned here is that with a maximum of three years to invest, investing in more volatile assets can lead to unwanted results.
It can also be beneficial to reduce the complexity of assets. For example, assets outside the US are exposed to currency movements, adding a layer of uncertainty that does not affect US assets.
2. Consider short-term instruments
Cash is a desirable asset for managing risk and liquidity and is certainly appropriate for very short horizons. Within the fixed income universe, securities with a maturity of less than three years, such as short-term bond funds, may be a good consideration.
3. Synchronize the time of goals with your assets
If you know your specific time horizon (for example, three months, 12 months, or three years), invest in products that generally match your perry financial services schedule. Consider these examples:
If you're saving for a down payment on a home that is due in six months, look for products like short-term government bonds or A rated corporate debt bonds.
If you have a down payment on a purchased item that is due in six months, and the remainder of the purchase price is due in 12 months, look for products with varying durations of six to 12 months, such as a tiered certificate of deposit (CD).
Make sure your perry financial services strategy works for Once your investment focus has been determined, additional implementation-related factors may be considered, depending on the products used. Your advisor can customize a plan that aligns with your short-term goals while taking into account a broader view of your overall investment strategy.