From time immemorial, investors or traders especially those who are planning for retirement have been advised to invest in a mixture of stocks and bonds. The idea behind the advice is simple. When stocks do well, their portfolios thrive. When stocks are having a rough phase, bonds usually do better, which helps balance out the losses. This is the most basic, time-tested way of investing, used by millions of investors, be it retailers or professionals.
Does the tenure of investment matter?
Time matters the most when it comes to saving and investing. Ongoing uncertainty and volatility in the markets have made it increasingly difficult to know exactly where, when, and how to invest- be it short-term, medium, or long-term investing. This is where investment strategies come into play. Whether you’re new to the investing world or simply looking for a refresher, here are a few different strategies to consider utilizing in today’s environment for long-, medium-, and short-term investments.
How to successfully balance short-term, medium-term, and long-term investments?
There are different needs for each age group, such as teenagers wanting to have a cell phone. When they start getting their salary, they want a motorbike or a car and want to go abroad. When they are in a stable position, they want to have a family, have a house. Importantly, the goal is to make money for retirement.
When you invest in stocks or mutual funds with a financial plan the room to generate more revenue continuously increases and that`s an indication of a sound financial plan.
The goal of short-term investment is to meet personal needs such as traveling, saving for a car, or a house down payment.
The investment portfolio is in the range of approximately 1-3 years.
The focus of short investment should be safety.
Careful consideration of investing in the following constitutes a short-term investment plan,
low-medium risk assets,
highly liquid which expects an average return of about 5% per year.
Such as mutual funds, about 20% of funds, 30% fixed-income funds, 40% mixed funds, and about 10% equity funds.
Aim for a potential return of around 3.5% to 4.75%.
The goal of medium-term investment is to improve and live a comfortable lifestyle and to meet personal needs such as traveling with family or friends, weddings, supporting elderly parents, saving for a second car or a house, and home renovations or improvements.
The investment portfolio is in the range of approximately 3 – 7 years.
The focus of medium-term investment should be to invest in assets with medium to high risk and emphasize highly liquid assets.
Strategize your investing in the following makes a medium-term investment plan.
about 10% debt
mixed funds about 20%
mutual funds of about 50%, and invest around 20% in stock dividends. Expect an average return of about 8% per year in this category alone.
Aim for a Potential return of around 4.5% to 5%.
The goal of long-term investment is financial planning for retirement as well as a child’s education fund.
Hence, the investment duration depends on the requirement for retirement, for example, now 33 years old, want to retire at 50 years, indicating that there are 17 years of saving time.
Aim for a Potential return of 7% to 10% on average
The focus of long-term investment should be to invest in assets with high risk.
Have the policy to invest in 30% stocks,
mixed funds, 20%,
Mutual funds 20%
Another 30% invested in stock dividends.
Aim for a Potential return of 10% per year on an average
Why is long-term investment more important than short and medium-term?
Since long-term financial planning for retirement is for life after retirement where there is no constant pay-check trickling in, it is more important than short and medium-term investment plans.
A few points to be not noted:
Risk and Volatility
Be it short, medium, or long-term term the investor must be fully aware of the amount of risk and volatility he or she can stomach. Risk-averse short-term investors may opt to grow their money steadily and safely through interest-bearing accounts with a very low-risk investment.
Investors with longer time horizons can afford to take more risk. The investors that belong to this camp can stay invested long enough to brush aside any downturns.
If you’re still decades from retirement Index funds, despite the short-term fluctuations and volatility are a good and safe bet.
Last but not least, don’t forget short-term and long-term investments are categorized differently, and the tax you’re required to pay after the sale of the asset differs.
Due to lower tax rates long-term capital gains are often favoured. Contradictorily short-term investors who frequently transact by buying and selling assets may eventually end up paying a higher tax that has the potential to erode profits. Having said that, short-term investments are still the top preference for many investors where the returns are substantially higher.
Can you do it on your own or do you need a financial advisor?
Every investment strategy is different and varies according to the individual goals and risk averseness. If the individual investor is knowledgeable about investments, he or she can implement their investment strategies.
It is also important to keep in mind that planning for long-term savings goals could be more complex and challenging than short-term savings goals. However, it is always a good idea to consider consulting an investment advisor or financial professional to guide you in choosing the right investment strategy to meet your personal needs.
End of the day finding the right balance is the bottom line to sail through the career and start a new and financially sound innings after retirement.
The key to building a well-rounded portfolio is to have a big-picture view of financial expectations risk tolerance, and time horizon. Most importantly a diversified portfolio with a proper mix of long, medium, and short-term investing plans.