Alpha Teach Yourself Investing in 24 Hours: An Analysis (part 35)

Investment Strategies (part B)

by

Charles Lamson

Short and Medium-Range Goals

I have spent a lot of time talking about long-term investing. Funding our retirement is the most expensive goal most of us have, and it is best achieved by long-term investment strategies.

However, all of our goals do not fall in a far distant time, so we need to have some strategies to deal with investment objectives that are in the short to medium time frame.

Investing for Short-Range Goals

Investing for a short-term goal requires a different strategy than long-term investing. Because you have only a short period in which to work, you cannot afford to be very aggressive.

Short-term investing, which Ken Little defines on page 222 of his book Alpha Teach Yourself Investing in 24 Hours, is two to five years, and more concerned with reaching a specific goal than beating the market. For truly short-term goals, investing will probably give way to savings.

For example, if I want to buy a car in three years that will require a $5,000 down payment, I must be sure it will be there when I need it. If I do not have any money saved, then I will need to invest about $130 per month at 5 percent to reach my goal.

At 5 percent, return is certainly possible in today's market, but we need to be sure we reach our goal, or no car. Investing in stocks or mutual funds is too uncertain over a short period like three years. We could lose money if the market goes south at the last minute.

In this case, the safest and surest strategy is a savings instrument like a savings account. If your bank offers a money market account with a low initial fee, you can switch from a savings account when you hit that number.

What if you have the $5,000, but will not need it for three years? You have some better choices in this situation. A bank CD with a maturity date close to when you will need the money is a good, safe choice. Another alternative would be to buy a high-quality bond, also with a maturity date close to your "needed by" date.

If you go the bond route, make sure you buy a bond you can hold to maturity, either a new issue or on the secondary market. You will remember from previous posts that bonds are interest rate sensitive. If interest rates go up after you buy your bond, you may be forced to sell at a loss because the value of the bond has dropped.

Investing for Medium-Range Goals

Medium-range goals of 5 to 15 years are a little easier to work with than short range goals because you have enough time to be slightly more aggressive.

For example, in 15 years you want to have at least $25,000 in a college tuition account for your three-year-old child. You could invest about $95 a month at 5 percent for 15 years and get there.

However, because you have some time to work with, you might choose to be more aggressive in the early years and less so the closer you get to your goal.

For example, you could take that $95 and put it in an aggressive growth fund. If the fund returned 10 percent for the 15 years, you would have almost $40,000 in the account.

That may be a little too optimistic, but if you keep an eye on the fund and move into something less aggressive if the returns do not stay up, you can still reach your $25,000 goal.

If you get nervous that the growth fund is not going to sustain its growth, you can pull out and lock your profits in a bond or a bank CD.

The concept to remember is that the closer you get to your goal in time and money, the more protective you need to be.

*SOURCE: ALPHA TEACH YOURSELF INVESTING IN 24 HOURS, 2000, KEN LITTLE, PGS. 221-223*

END