March 7, 2013
|Stuart Ritter, CFP®, a financial planner and vice president of T. Rowe Price Investment Services|
Short-term investments—which include money market securities, short-term bonds, short-term certificates of deposit, and checking and savings accounts—are intended to provide a measure of stability and liquidity in your portfolio.
The role of short-term investments is to provide a stable component to your portfolio for goals that are less than 10 years away and to ensure that a portion of your assets is readily accessible in the event of a sudden unexpected expense. Although stability and liquidity naturally come with a potentially lower rate of return than other asset classes, having these characteristics in your portfolio is often more important than achieving growth when your time horizon is short.
If you are seeking to invest for the short term, you are most susceptible to the risk that the stock market will go down in value. By carefully considering your investment objectives, you can identify where in your portfolio short-term investments may serve you best.
Emergency fund: Your emergency fund should include three to six months worth of expenses that you can tap in to in the event of job loss, prolonged illness, or other setbacks. If you need to access that money, you won't be able to wait for the markets to recover or for a multiyear certificate of deposit to mature—that means investing in a short-term investment that is readily accessible and has a high probability of retaining its value in the short term, such as a savings account or money market securities.
Short-term goals: If you're saving for a specific purchase you intend to make in two years or less, preserving—not growing—the value of your savings remains the primary purpose for this money. While you may have a little flexibility in terms of when you'll need these assets, you still want to preserve their value. As a result, short-term bonds, short-term certificates of deposit, and money market securities may be appropriate investments to consider.
Retirement: You have a decades-long time horizon for your retirement savings when you are younger. Beginning at age 55, short-term investments start playing a small but important stabilizing role in your retirement portfolio that continues through the rest of your life. You are less able to recover from the effects of a down market as you age, so you must do more to protect your assets from volatility. That said, your retirement assets must last you throughout retirement, not just to retirement. As a result, growth-oriented investments, such as stocks and bonds, have an equally important role to play in your retirement portfolio.
There is measurable value to preserving your savings as your time horizon decreases in order to achieve important short-term goals. Whether you are setting money aside for your next home, your child's college education, or retirement, short-term investments can help ensure that the money you've invested will be there when you need it.
An investment in a certificate of deposit or other bank product may be insured, while an investment in stocks, bonds, or mutual funds is not.