When it comes to investing, it’s a good idea to categorize investments that are intended for long-term goals vs. those that are intended for short-term goals. In personal finance circles, long-term goals are usually those that will take more than a year to achieve. Short-term goals are those that are more immediate. The investing strategy that individuals and families should focus on will depend upon what they are looking to achieve.
As noted above, short-term investments are those that will fund short-term goals. In other words, a household should ask what they want to achieve in the next year. For example, this might involve saving up for a gently used car to replace a heavily used car that’s about to fall apart. In this instance, the money that’s earmarked for the newer car should not go into volatile investments like stocks. Those investments can drop in value quite quickly. They could also go up in value, but the risk may not be worth it for those who do not have much of a nest egg to fall back on. Instead, investing this money in a savings account, a money market account, or a certificate of deposit would be a better idea because growth is not a major concern.
With the possible exception of a down payment on a home, a person or a family will need to access this money more than a year down the road. For example, a long-term investment might involve the goal of saving for retirement or gaining passive income to offset living expenses. Long-term investments should go into areas that are more likely to provide long-term growth. This will most likely involve stocks, bonds, or funds that hold a range of these investments.
Saving up for a down payment on a mortgage might fall outside the realm of a short-term investment or a long-term investment. It might take more than a year to accumulate this money. However, it may make sense to keep this in an account that provides little growth and low volatility. Ideally, it would not take ten years to accumulate a down payment, and it’s not earmarked for long-term retirement or income goals. Therefore, a down payment might fall outside the normal rubric tied to short-term and long-term investments.