A short-term investment is generally an investment made with the intent to hold for a temporary period of time. There can be many reasons people choose short-term investments. One of the most common is simply the aim of trying to make money quickly. Another is to invest money that they might need to use sooner rather than later. Or it could be when a particular goal is being aimed for—a major purchase, education costs or something else. For some, adopting a short-term strategy could simply be the way they prefer to invest their money.
Whatever your motivation might be, carefully considering your approach to short-term investing is a good idea. In particular, we believe that aligning any short-term investment decisions you might make to a long-term plan is the best way to meet your retirement income needs. Some short-term investments may not be the most appropriate way to meet your personal financial needs—in the near term or the long term.
Some investors may use the following as short-term investments:
However, financial markets can be volatile in the short term. Therefore it can be difficult to pick the correct moments to move in or out of the market. Financial markets do not conform to arbitrary dates set by investors, and they may not meet our expectations of how they are going to perform. Attempting to time the market can result in serious financial risk.
Different types of securities or investments may have a place in your portfolio. But using these investments to make short-term moves may be risky.
If you are relying on a certain amount of money for immediate or short-term needs, you may not want to invest in assets that could involve loss. Investing in financial markets involves the risk of loss, and even an experienced investor could potentially lose money. This is no matter how precisely you might try to time making an investment.
Gauging the markets can be difficult. Investing at the wrong time in an attempt to time the market could significantly impact your financial situation. Entering the market at an inappropriate time could result in unexpected financial loss. Exiting the market too early could mean missing out on higher returns that could have provided growth. If you require long-term growth of your portfolio, trying to time short-term moves could put your assets at risk and leave you unable to meet your longer-term needs.
Markets don’t operate on a set schedule, and just because the market has been up recently or down recently doesn’t mean it necessarily will continue to do so—past performance does not indicate future results. The same goes for what are termed market corrections. These are sharp, sentiment driven market declines of approximately 10 to 20%. Corrections could last for several months, with the price bottoming out before rising again. When making a short-term investment, can you afford to risk a market correction that could ruin your expectations?
Whatever you decide, investing money needed for short-term necessities, such as bills, may not make the most sense. It may make more sense to put this money in savings accounts or other cash-like instruments.
Keeping a large portion of your portfolio in cash may not be the most appropriate allocation if you need long-term growth for your investments. However, cash can be an appropriate way to keep funds that are needed in the near term. Savings accounts offer varying interest rates, and if the institution is a qualified UK-authorised bank your funds will be guaranteed by the Financial Services Compensation Scheme up to a certain compensation limit. [i]
Other cash-like instruments include certificates of deposits. These savings certificates have interest rates that can vary based on the length of deposit. They can potentially offer higher interest rates than regular savings account, but unlike savings accounts they require that the funds stay deposited for a certain length of time.
Cash ISAs are another option for earning interest on savings. Interest rates may vary, and there are contribution limits. [ii]
When considering where to place cash for short-term investing needs, carefully consider your options. Interest rates can vary significantly across investments or account types, and different providers may be better suited for your needs. If you can commit to investing for a fixed period of months or years, then you may be able to find better interest rates and earn more on your cash. But you will unable to access your money in the meantime, at least not without penalties.
Even if you choose to invest some of your assets in short-term assets, we believe that focusing on planning for long-term financial needs is important and is more likely to offer success for more investors. It is not always easy to wait patiently while your investments grow over the long term, but keeping disciplined may help your portfolio achieve the growth you need.
Making investment decisions aligned with a longer term plan could help investors to potentially avoid making harmful short-term or emotionally driven investment decisions.
A long-term investing strategy can also avoid some of the costs of short-term investing. Continually trading and trying to beat the market involves a considerable investment—of time and effort. In some instances, the cost of multiple transactions—buying, selling and transferring—can in itself prove quite costly.
To put it another way, it is our belief that, in general, time in the market is better than trying to time the market. We believe adopting a long-term strategy is the best approach.
Fisher Investments UK is an independent firm that has helped thousands of investors in the UK and elsewhere to learn more about their investment choices. Maintaining discipline while investing in your retirement portfolio can be difficult. A trusted advisor may be able to help.
[i] Source: Financial Services Compensation Scheme, as of 05/31/2019. www.fscs.org.uk/what-we-cover/banks-building-societies/
[ii] Source: The Money Advice Services, as of 05/31/2019. www.moneyadviceservice.org.uk/en/articles/cash-isas