Are Short-Term Investments Good for Building Wealth?
Does your portfolio include short-term investments? Short-term investments are an important component of a well-balanced investment portfolio. While they typically provide a lower level of return than long-term investments, they also provide a lower level of risk.
You can also use short-term investments if liquidity and immediate access to cash are more important to you than higher investment returns.
What is a Short-Term Investment?
The most common definition of a short-term investment is an investment that will be liquidated and used within three years. However, the meaning of short-term really depends on your needs and the purpose of the funds you have invested.
A key difference between a short-term investment and a long-term investment is how quickly you can convert it to cash.
Short-Term Investing for Specific Needs
A classic use of short-term investing is for an emergency fund. An emergency fund is separate from your investment portfolio and should provide quick access to funds that cover at least three to six months of your regular expenses. Emergency fund investments should be highly liquid and low risk.
You could also establish a stand-alone short-term investment portfolio for specific planned expenses such as a new car, vacation property down payment, home renovation, or a dream vacation. In most cases the expense date is known, enabling you to optimize the most appropriate short-term investment vehicle.
Preserving and Building Wealth
Short-term investments, being less risky than stocks and longer-term bonds, are an important component of any portfolio. They provide protection against volatile economic periods and prolonged securities market downtrends, which are not possible to predict in advance.
Investing in short-term investments can be viewed as an asset allocation tool. Increasing your portfolio allocation to short-term investments provides stability and can help to preserve your capital, even contributing to wealth building when securities markets are negative.
Types of Short-Term Investments
Short-term investing is more than just parking your money in a savings account. You are making investments that will provide greater returns than cash but can be quickly converted to cash.
Key qualities of a short-term investment are:
- Liquidity – quick and easy conversion to cash.
- Stability – Low risk of losing all or part of your investment.
- Low transaction costs.
Short-term investments can include CDs (Certificates of Deposit), money market instruments, Treasury bills, short-term bond funds, and GICs (Guaranteed Investment Certificates) which provide a guaranteed return over a specific period but carry a penalty if liquidated before the maturity date.
It is always best to obtain the help of a financial professional who knows your overall financial position. They can determine what type of short-term investment is best suited to your needs.
An Alternative to Short-Term Investments
If you are looking for a more stable component of your investment portfolio and you have ongoing short-term cash needs, a dividend-paying stock portfolio can provide both short-term and long-term investing. While the underlying stock portfolio provides the long-term benefit of stock price appreciation, the regular monthly or quarterly dividend payments can be very attractive.
For over 25 years, Bloom Investment Counsel has specialized in investing in dividend-paying stocks. We provide actively managed, customized Canadian and U.S. dividend-paying portfolios for wealthy individuals, family offices, foundations, corporations, institutions, and trusts. Get in touch with us today by calling us at +1-416-861-9941 or emailing us at info@bloominvestmentcounsel.com
This content is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this content should consult with his or her financial partner or advisor.