You don't have to cross your fingers and hope that a strong stock market will align with your short-term goals. Now, you may not want to.
Because you work for a short period of time (think two to six years) to provide investments for shorter goals, such as buying a home or paying for a wedding, should look different from the portfolio you are going to retire. But, when you are working towards your short-term goals, don’t stop investing in your long-term goals.
So, how do you balance savings between the two?
How to think about short-term and long-term target funds
Don't save long term to achieve your short-term goals. Due to the power that becomes complicated over time, early savings can have a big impact on your long-term outcomes. The longer the time range, the greater the potential impact. You should place your retirement front and center, especially when approaching an intermediate pro.
Early in your career, you may transfer your savings to your short-term goals, but retirement should still be part of the equation. At the very least, take advantage of any retirement competition that the employer may offer. To some extent, what you want to save can also increase the balance. If you save for your home rather than take a vacation, you may transfer more of your savings to retirement.
Account type for short-term investments
It helps to separate your short-term portfolio from your retirement portfolio, but you can use some accounts for multitasking. Depending on your case, you may use a tax-deferred account, such as a Roth IRA or a taxable brokerage account. A traditional IRA is less attractive to short-term investments because you get a tax penalty when you exit your account before you are 59 and a half years old.
Unlike traditional IRAs, Roth IRA contributions can be withdrawn at any time, without taxes or fines for any reason. This makes Roth IRA the perfect “multi-tasking” account for young investors who need to build emergency funds and retirement assets. Roth IRAS also allows you to withdraw up to $10,000 in proceeds (in addition to any donations) to help pay for the down payment of the first home if the account has been open for at least five years.
Find the right investment to achieve near-term goals
Unlike the long-term portfolio’s schedule for more than 10 years, the main goal of a short-term portfolio should be to outperform inflation while protecting what it saves. Maximizing portfolio growth is not a high priority because the increased risk may not be worthy of reward. Being able to buy a home in three years feels a lot different than the one offered in the seventh quarter because your investment loses value during the transition period.
Common mistakes investors make are either taking too much risk or not enough. Some investors may think that since stocks have beaten other asset classes for a long time, they are also a good option in the short term, but not.
Other investors may stick to guaranteed products, such as CDs or money market accounts, because they are concerned about protecting their savings. This approach puts them at a disadvantage because inflation gets stuck in the value of these savings. If your timeline is very short, it is a good idea to hold a cash-based investment in less than two years.
Short-term portfolio examples
Explore model portfolios that show what a reasonable short-term portfolio looks like. The portfolio consists of cash and short-term bonds. You might include a whole bunch of stocks to gain growth potential, but most of the funds for your short-term target should be in units of safer, less refundable assets.
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This article was provided by Morningstar to the Associated Press. For more personal financial management content, please go to
Margaret Giles is a senior editor in Morningstar content development.