Short-Term Investing

“Short-Term Investing” – what does that even mean? We’re going to talk about the kind of investing that’s done with money intended for use in the next 5-15 years for specific goals. Let’s say you’re intending to buy a house in around ten years – it’s going to make sense to invest that rather than put it into a Savings Account or a Certificate of Deposit (“CD”) for example.

What sort of account should I have?

Brokerage accounts are the name of the game here. Generally, you would hold these accounts with a large financial institution – three common providers that we would recommend are Vanguard, Charles Schwab and Fidelity. All of these companies offer accounts with many low cost investing options. 

How much money should I put into my brokerage account?

Short-term investing is low down the hierarchy of where your income gets allocated each month. We’ve been through budgeting, saving, paying down debt and putting away money for retirement. This is the next step once you’ve got those parts of your financial house in order. You have your emergency fund at a level that you feel comfortable, you’ve paid down high interest debt and you’re contributing to your retirement accounts. After that, you begin to think about what you want to put this additional money to work on.

Assign specific amounts to your goals

First figure out what goals you want to work towards, and the timelines of those goals. This will help you to determine what your portfolio should look like. To go back to the house purchase example, if you know you want to purchase a $300,000 home with 4 bedrooms and 3 bathrooms and you can save $750 a month, then it’s going to take you 80 months to save up the $60,000 down payment you need. So in 6 years and 8 months, you’ll have that money saved up for the down payment, and that is a time horizon you can begin to work towards. 

What should my portfolio look like?

Again, the tricky question… Because this investing is intended for the shorter term, the portfolio allocation can be a bit more prescriptive. The shorter the time horizon, the less risky your portfolio should be, skewing towards bonds rather than stocks. It’s up to you how exactly to allocate your investments, but an easy way to approach this when you’re not sure where to start is to invest in a “target-date fund”. These funds are Mutual Funds or Exchange-Traded Funds(“ETFs”) that contain a mix of stocks and bonds suited towards certain timelines and each of the large brokerage firms mentioned above have a collection that you can invest in. 

Target Date Funds

Often, you’ll find these referred to in terms of how many years you have until retirement, but if you substitute retirement for whatever your goal is, the ultimate outcome will be the same. You can find more information on those funds at these links for Vanguard, Schwab and Fidelity. The nice thing about many of these funds is that, as the target date approaches, the allocation of assets will be automatically adjusted to reflect how close you are to needing the money. That is to say that the portfolios will become less risky as you get closer to your target date. 

Conclusion

Investing can be incredibly complex, but it doesn’t have to be. As you begin investing, the easiest thing to do can be to get your money working using one or more of these mutual funds, which will make sure that you don’t have cash sitting unused when it could be earning returns. As you learn more about investing, you may decide that you wish to add a layer of complexity, and start selecting some of your own investments outside of just mutual funds or ETFs, and you can start to adjust your portfolio accordingly.

That’s it for Ostrich’s short-term investing guide!

Now check out Investing Part 1: Retirement Accounts if you missed it. As well as our other 101 guides such as debt 101, giving, and saving & budgeting 101.