Building Your Portfolio

Investing for Different Time Periods

Part of setting investment goals is determining when you will need the money to pay for them. Your investment strategy will vary depending on how long you can keep your money invested. Most goals fit into one of three categories—short-term (less than three years), medium-term (three to ten years) and long-term (more than ten years).


Short-Term Goals (Less than Three Years)

Because you plan to spend the money you set aside for short-term goals relatively quickly, you'll want to focus on safety and liquidity rather than growth in your short-term portfolio. Insured bank or credit union accounts as well as Treasury bills backed by the government's promise to repay are generally considered safe investments. Liquid investments are those you can sell easily with little or no loss of value, such as Treasury bills, money market accounts and funds, and other low-risk investments that pay interest. If those investments have maturity dates, as T-bills do, the terms are very short.

For example, say you're saving for a down payment on a house that you hope to buy in about a year. If you've invested the money in stock funds and your portfolio fell sharply just as you were about to start your home search, you might have to postpone your plans to buy, or choose a less expensive home. On the other hand, if you had given yourself a little more time to accumulate the funds for a down payment and invested them in liquid cash investments or insured bank products such as certificates of deposit (CDs), you could be more confident that the money you need would be available when you were ready to make an offer.

Cash investments typically pay lower interest rates than longer-term bonds—sometimes not enough to outpace inflation over the long term. But since you plan to use the money relatively quickly, inflation shouldn't have much of an impact on your purchasing power. And keep in mind that some cash investments offer the added security of government insurance, such as bank money market accounts and CDs, which are both insured by the Federal Deposit Insurance Corporation. U.S. Treasury bills are another choice for short-term goals. Because they mature in 13 or 26 weeks and are issued by the federal government, they're sometimes described as risk-free investments.


Medium-Term Goals (Three to Ten Years)

Choosing the right investments for mid-term goals can be more complex than choosing them for short- or long-term goals. That's because you need to strike an effective balance between protecting the assets you've worked hard to accumulate while achieving the growth that can help you build your assets and offset inflation. Here are possible strategies for managing a portfolio of investments for goals that are three to ten years in the future:

  • Balance your mid-term portfolio with a mix of high-quality fixed-income investments—such as a mid-term government bond fund or high-yield CD—with modest growth investments, such as a diversified large-company stock fund. Then monitor the stock investments closely and be prepared to sell to limit your losses if there's a major market downturn.
  • Establish limits for gains and losses in your mid-term stock portfolio. For instance, you may decide ahead of time that you'll sell an investment if it increases in value 20 percent or decreases 15 percent—or whatever percentage you're comfortable with. As your goal approaches, you can reinvest your assets in less volatile investments.

Balanced funds, which usually invest in a mix of about 60 percent stock to 40 percent bonds, growth and income funds, or equity income funds that invest in well-established companies that pay high dividends, might be appropriate choices for a mid-term portfolio. Ultimately, the key to achieving modest growth while minimizing risk is to keep a close eye on performance and gradually shift to more stable, income-producing investments as the date of your goal approaches.


Long-Term Goals (More than Ten Years)

The general rule is that the more time you have to reach a financial goal, the more investment risk you can afford to take. For many investors, that can mean allocating most of the principal you set aside for long-term goals to growth investments, such as individual stock, stock mutual funds, and stock exchange traded funds (ETFs).

While past performance is no guarantee of future results, historical returns consistently show that a well-diversified stock portfolio can be the most rewarding over the long term. It's true that over shorter periods—say less than 10 years—investing heavily in stock can lead to portfolio volatility and even to losses. But when you have 15 years or more to meet your goals, you have a good chance of being able to ride out market downturns and watch short-term losses eventually be offset by future gains.

In addition, some investors successfully build the value of their long-term portfolios buying and selling bonds to take advantage of increases in market value that may result from investor demand. Others diversify into real estate or real estate investment trusts (REITs). The larger your portfolio and the more comfortable you are making investment decisions, the more flexible you can be.


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