Divide your portion to seven, or even to eight, for you do not know what misfortune may occur on the earth. – Ecclesiastes 11:2
There are varying approaches to meeting your investment goals. No one-size-fits-all will work for everybody. A strategy that works for retirement savings could be a poor fit for a home down payment or for building up an emergency fund.
Let’s take a look at some basic investing strategies for short- and medium-term goals. This is all dependent on your risk tolerance level, the returns you expect, and your liquidity (cash) needs.
Short-Term Goals
Short-term investing goals have a time horizon of one year or less. They include things like a security deposit for your home or an emergency fund. With short-term goals, your aim should be a low level of risk and a high level of security. You don’t want to lose any money when you need to sell an investment to get your cash. And that’s the main idea behind liquidity—the ability to get your cash without either delay or loss. Stability comes at a cost, though. You’re not going to earn much of a profit. Low returns are the flip side of the low-risk investment; that’s why you can have confidence you’ll have all of the money you need when you need it. Examples include regular savings accounts available at banks and credit unions, which are the primary deposit takers for cash you need and can’t afford to lose.
Another example is a Certificate of Deposit (CD), which offers a higher yield than most savings accounts with the same low risks and built-in incentive to keep your hands off the cash. If you have a tendency to pull money out of your savings accounts and would like more incentives to leave your money, a “CD” might be just the right short-term investment.
Medium-Term Goals
If you’re looking to invest over a time period of one to five years, your best options are those that give you a little more interest. That means taking on a bit more risk in some cases, but you’ve got to give some to get some. Whether your desire is saving for a house down payment, a new car, or a home renovation you are eager to bring to life, the investment products below are a solid way to provide reasonable room for growth on your funds in a taxable investment account subject to market conditions.
Short-Term Bond Funds afford higher returns than bank deposit products, have potential tax-free income on certain funds, and are highly liquid. If you’re comfortable with slightly more risk than you get with bank deposits, check out short-term bond funds. Available as mutual funds, these diversified bond funds historically offer better yields than most savings accounts, making them ideal for money you’ll need in the medium term.
Unlike bank deposits, bonds are not insured, meaning you can lose the money you invest, especially if you aren’t careful when selecting funds. To minimise risk, choose funds featuring high-quality, investment-grade corporate and government bonds.
A Diversified Index Fund Portfolio involves a combination of stocks and bonds, which give good liquidity; more exposure to stocks may provide more upside. A medium-term time frame allows you to consider the possibility of putting money into a mix of stock index funds in addition to bonds, which can enhance your returns. Equity index funds can hold hundreds of individual stocks, as they aim to mimic the performance of a particular index. While they’ve historically offered solid long-term returns, stocks do come with the potential for negative returns.
If you choose to invest in a portfolio of investments, keep in mind that you’ll need to do some research to make sure your funds have reasonable returns and performance. If you like the idea of investing in low-cost index funds but don’t want the hassle of managing the accounts, there are a number of financial institutions in Jamaica. Lastly, it is advisable that you speak to a licensed financial advisor in selecting the best option to achieve your goal.