Short-Term Investing
Ryan Latimer
May 10, 2005
While many investors have established a personal investment plan for their short & long-term financial goals, few people have focused on the need for a savings plan and investment plan to meet their short-term goals. Some important decisions to make in order to attain your short-term financial goals should include:
How will you reach the goal?
How much risk can you or are you willing to take?
How you will invest to meet the goal?
How soon will you need the assets/money to meet your goal?
There are a variety of investment choices when investing for your short-term financial/investment goals. You could be saving for a new house, a vacation, a new car, or education for your children.
Cash and cash equivalents are smart choices for when considering your short-term investment goals, saving for a “rainy day” or emergency fund. Some of the most popular types of cash equivalent investments include: Treasury bills, certificates of deposit, some types of money bonds, money market accounts and money market funds.
Most investment advisors will tell you to take as much risk as you can take in order to build your wealth and reach your investment goals. Some people are content to just leave their money in a bank savings account collecting a minimal amount of interest. Something to consider if you are going to leave your money in a bank account; the average interest yield on a taxable money-market account is around 1.5% compared to a 3% CD returns. But keep in mind that inflation should be factored in to the investment.
When it comes to evaluating your short-term financial goals, you don’t want to look at investments options that only return 1.5-3%. You want to look at options that will return significantly more than a paltry 3%. In order to achieve your short-term goals and make your investments worthwhile, you want to have a return of at least 8%. Your plan of attack should have 2 areas of focus. Long Term Focus (i.e. retirement) should be invested aggressively, keep in mind that the drop or hits you will take will usually be made up by the market’s long-term growth. Short Term Focus will be needed in the next 1-3 years should be invested more cautiously. You might not have time to make up for any drops in your investment. If you will need the money within the next three years you are probably going to want to also avoid mutual funds and real estate investment trusts which can drop if interest rates increase. If you will need the money within the next five years you are going to want to avoid individual stocks.
Some safe investments for your short-term investment goals should include:
These are safe and stable investment options that won’t expose you to much risk. Also, they don’t require a large initial investment.
When investing, investors need to keep in mind that the real return on their investment is the return they have left after they pay Uncle Sam and his cousins in the state and local tax collection offices. There is a huge difference between a 10% gain taxed at 36% and a 10% gain taxed at 20%. You need to consider the waiting time when investing and cashing out your investments. You need to ensure that you get the most favorable tax rate possible when selling an investment.
Tax consequences should always be something you should consider when selling a investment, especially short-term capital gains. You should never let taxes be the tail that wags the investment dog. The decision whether to keep or sell an investment should never be made based on tax consequences alone. For more information on figuring out how taxes affect your investment decisions, you should contact your broker or tax professional.
There are a variety of investment choices when investing for your short-term financial/investment goals. You could be saving for a new house, a vacation, a new car, or education for your children.
Cash and cash equivalents are smart choices for when considering your short-term investment goals, saving for a “rainy day” or emergency fund. Some of the most popular types of cash equivalent investments include: Treasury bills, certificates of deposit, some types of money bonds, money market accounts and money market funds.
Most investment advisors will tell you to take as much risk as you can take in order to build your wealth and reach your investment goals. Some people are content to just leave their money in a bank savings account collecting a minimal amount of interest. Something to consider if you are going to leave your money in a bank account; the average interest yield on a taxable money-market account is around 1.5% compared to a 3% CD returns. But keep in mind that inflation should be factored in to the investment.
When it comes to evaluating your short-term financial goals, you don’t want to look at investments options that only return 1.5-3%. You want to look at options that will return significantly more than a paltry 3%. In order to achieve your short-term goals and make your investments worthwhile, you want to have a return of at least 8%. Your plan of attack should have 2 areas of focus. Long Term Focus (i.e. retirement) should be invested aggressively, keep in mind that the drop or hits you will take will usually be made up by the market’s long-term growth. Short Term Focus will be needed in the next 1-3 years should be invested more cautiously. You might not have time to make up for any drops in your investment. If you will need the money within the next three years you are probably going to want to also avoid mutual funds and real estate investment trusts which can drop if interest rates increase. If you will need the money within the next five years you are going to want to avoid individual stocks.
Some safe investments for your short-term investment goals should include:
- Treasury strips
- Low-Risk Stock Funds
- Bonds
- Loan Participation Funds
These are safe and stable investment options that won’t expose you to much risk. Also, they don’t require a large initial investment.
When investing, investors need to keep in mind that the real return on their investment is the return they have left after they pay Uncle Sam and his cousins in the state and local tax collection offices. There is a huge difference between a 10% gain taxed at 36% and a 10% gain taxed at 20%. You need to consider the waiting time when investing and cashing out your investments. You need to ensure that you get the most favorable tax rate possible when selling an investment.
Tax consequences should always be something you should consider when selling a investment, especially short-term capital gains. You should never let taxes be the tail that wags the investment dog. The decision whether to keep or sell an investment should never be made based on tax consequences alone. For more information on figuring out how taxes affect your investment decisions, you should contact your broker or tax professional.
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