Ideally, investment planning involves a long time horizon – 10, 20, or even 40 years – to reap the benefits of long-term gains in the stock market. When you’re saving for buying a house, paying college tuitions, or funding your own retirement, such long timelines help grow your nest egg and protect you from occasional downturns in the economy.

But what happens if you don’t have that much time? Perhaps you didn’t get started saving and investing when you were younger because you didn’t make much money, you were starting a business or you had a lot of expenses such as student debt. Or perhaps major life changes have changed your investment goals and needs.

A Three- to Five-Year Investment Horizon

Investment planning for a three- to five-year period is considered “short-term” investing. It involves a different mix of investment instruments than long-term investing, and requires a realistic set of goals because, by nature, shorter-term investments generally carry lower rates of return. There’s only so much you can accomplish with a short time horizon, but with careful planning, you can make the most of the money and the time you have.

Investment Mix

While stocks and mutual funds are strong instruments for a long-term investment planning strategy, they may not yield high enough returns to anchor a short-term investment plan. Following are some instruments that are more appropriate for a three- to five-year investment horizon:

Money market accounts pay a higher interest rate than do savings accounts, and usually require a minimum investment and minimum ongoing balance. Their interest rate structure also is more complex. Their returns are tied to current interest rates on the money market. They don’t yield as much return as good quality equity stocks, but they offer stability.

Short-term bonds are considered safe investment vehicles with low risk because they are backed by the U.S. government. A variety of short-term bonds are available such as Treasury bills (T-bills), municipal or state bonds, and bonds that are floated to fund local projects. T-bills have maturity rates ranging from a few days to 52 weeks, so you’re not tying up your money for long. But the safety and short terms of these government bonds is balanced by a fairly low rate of return. Still, they are an option for the risk-averse short-term investor.

Treasury notes, like short-term bonds, involve loaning your money to the government, but for a longer period of time. T-note maturities range from two to 10 years and pay interest every six months. Though they have fixed maturity dates, T-notes can be bought and sold on the bond market, giving them a high degree of liquidity. The downside of that liquidity is a low rate of return, compared with stocks.

Certificates of deposit, like savings or money market accounts, offer slightly higher interest rates that go higher the longer the term of the CD. By purchasing a CD, you are essentially loaning the bank money for a specified period – say, 6 months, 12 months, or even longer. The catch is that you must leave your money in the CD for the length of the term you purchased, or face penalties for early withdrawal.

Short-term corporate bonds allow you to loan money to businesses that sell bonds to raise money, similar to the way government bonds involve loaning money to the government. Corporate bonds are riskier because they are not backed by a U.S. government promise to repay them. But with higher risk comes higher rewards, so corporate bonds offer a higher rate of return than do government bonds. The maturity periods for corporate bonds are determined by the issuing companies. Investors with lower risk tolerance may want to consider a corporate bond fund, which bundles the bonds of several companies and balances the risk.

Other short-term investment instruments include brokerage accounts and cash management accounts.

Make Short-Term Investment Planning Work for You

There’s no need to let a short time horizon hold you back from effective investment planning. The gains you can make from strategic short-term investing inevitably outweigh the benefits of doing nothing. The key is to get started as soon as possible.

If you would like to discuss a short-term investment planning strategy, contact your Barnes Wendling advisor.

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