People invest because they want to achieve certain goals. Invariably, your investment goals will be defined by two features: the amount of money you want to end up with and the time within which you will need it. It may be tempting to focus all your attention on the former. However, the time horizon is a crucial consideration because it will determine which assets you invest in. Generally speaking, investment goals can be classified as short-, medium- and long-term. What should you consider per category? We explore below:
1. Short-term goals
These are goals which need to be achieved within 1-5 years, for example buying a car, building your rainy day fund, or saving for a vacation. The investment you pick for short-term goals need to be low-risk in order to keep the capital intact. The flip side is that you may have to settle for a lower return. They should also be very liquid. High interest savings accounts and fixed deposit accounts are good options for investors with short term goals.
2. Medium-term goals
Medium-term investments generally span 5-15 years and the underlying goal could be paying for your children’s education, or building or buying a home. Unlike short-term investments, medium-term ones give you the benefit of a little extra time to build a balanced investment portfolio. Since you have more time to recover in case of capital loss, you can afford to take on investments with moderate- to high-risk, which usually yield greater returns. Ultimately, the exact assets you pick will depend on your risk tolerance.
3. Long-term goals
Any goal spanning 15 years or more is considered long-term. The most common long term investment goals are saving for retirement and building wealth. Investors with long term-goals can grow their portfolios by taking on high-risk investments but with the chance of capital loss in the short- and medium-term. However, even those with a low risk appetite can take advantage of compounding interest and the long time horizon to build their investment portfolios gradually. Liquidity is not a concern for investors with long term goals.
In conclusion, your choice of assets should be based on the amount of time you have to achieve your investment goals. For help managing your portfolio and meeting your investment objectives, contact clientservices@sib.co.ke.