Investing for the Short Term

Almost all financial planning and advice focus on investing for the long term. The principal investment goals most people have are building wealth for retirement, and saving for the kids' college expenses. Long term investing often involves some degree of risk, primarily from investing in stocks. Taking moderate long term risks makes sense because it allows you to profit from the larger gains that stocks often provide, compared to bonds and bank accounts.

However, people also have important short term financial goals. Investing for the short term is very different from long term investing. Short term goals may include things like building an emergency cash fund (of three to six months living expenses), saving up a downpayment for a house, accumulating funds to cover medical expenses of an elderly parent who has declined and needs a lot of care (remember, Medicare and Medicaid don't cover everything), and building up your stash of cash so that you can pay for a new roof. Another scenario that is fairly common is that your child is 14 and you've just started to save for his or her college expenses.

With all these types of expenses, a common element is you can't afford to lose the money. The emergency cash fund is your insurance policy against every risk in your life that isn't insured by a traditional insurance policy. Lose the downpayment and you'll have to keep renting. Living with a leaky roof isn't fun. And when Mom or Dad needs medical care, they need medical care. So how do you invest the money?

Money market funds, especially those that invest only in U.S. Treasury securities, are generally safe and will pay competitive interest rates. Online banks often pay competitive interest rates and are federally insured up to $100,000. Regular bricks and mortar banks and credit unions also offer federally insured accounts (up to $100,000), although their interest rates are usually lower than money market funds or online banks. U.S. Treasury bills and short term notes, and short term bond funds, are likely to be reasonable investments for short term money. But they involve a little more trouble and perhaps investment savvy, than many people would want to be bothered with.

Perhaps this is obvious to many. However, with the Dow Jones Industrial Average having set a remarkable number of new highs in recent months, there are probably some who are investing short term money in stocks. It isn't fun to watch the market move up like this if you have, say, $20,000 sitting in a money market account earning 4.9% a year. But those who forget that the market can go down (and is more likely to go down after a major upwards spike) are doomed to get their butts bit when it happens (and it will). Some people who invested their downpayments in the hot stock market of 1999 lost the opportunity to buy a home when the market fell away in 2000.

When you can't afford to lose the money, don't put it into volatile investments like stocks. Do what is simple and safe.

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