Meeting different goals throughout your life
With increased life expectancy, the goal posts for what are considered short, medium and long term are shifting, more so for younger individuals. This is because someone in their mid-20s today might spend 40 to 45 years working and then have 20 to 30 years in retirement. So those in their 20s and 30s may want to consider medium-term objectives to be between 10 and 30 years, and long term as anything over 30 years.
Recognising when it is appropriate to invest and when it is better to save money in cash to meet your different goals is very important. In general, anything you’ll need money for in five years or less is seen as short term, while goals set for five to ten years from now are considered medium term. Long-term goals are usually those for which you’ll need money in ten or more years.
Short-term goals that you are aiming to achieve over the next one to five years, such as buying a new car or the next holiday, are better suited to cash savings. This is because investing in the stock market over short time frames exposes you to potential volatility, and if the market falls you will have little time to recoup any reductions in your money.
If you’re only saving or investing for a relatively short period of time, you need more certainty about how your savings and investments will perform, and for your money to be easily accessible.
Medium term refers to investments with a five to ten-year time horizon. So your goal is further away than a short-term investment, but it’s not in the distant future. Medium-term investment goals might include paying for a wedding, starting a business, paying for your children’s education, or something similar. With medium-term investments, you can afford to ride out some market volatility, which you can’t in a short-term investment.
You may also start introducing shares and bonds into your portfolio, as you’ll have more time to grow your investments and longer to recover from any downturns along the way.
Long-term investments sit on the distant horizon, typically ten years away or more. It’s out of sight, but not entirely out of mind. A longer time horizon gives your money time to work, and time to enjoy the benefits of compounding. This is when you reinvest any returns, along with your initial investment, to generate further returns in future.
It also means you’re able to diversify your portfolio, including a mix of assets that offer a healthy blend of risk and return, and with sensible protection and varied exposure. Relatively speaking, time is on your side, so you should be able to ride out the volatility of the market.
Risk and return
When people talk about risk, they’re usually referring to market risk. Investing in the stock market can be volatile because of uncontrollable events like an economic downturn, political upheaval or a natural disaster that can cause large price swings.
Market risk varies depending on what you invest in. Emerging markets, for example, are considered riskier than developed markets. There are other risks to consider, such as currency risk (fluctuating exchange rates) and longevity risk (the risk that you’ll outlive your savings). No investment comes without risk, and there’s always the chance you could get back less than you invest.
As a rule of thumb, the more risk you take, the higher the potential return should be. While equities are seen as the highest-risk traditional investment, they have over the very long term delivered the strongest returns.
It’s important to think carefully about how much risk you’re comfortable taking on. If, for example, you’re close to retirement, you’ll want to avoid any market corrections just before you take your money out.
Asset allocation is the term used to describe how you split your money between different investment types such as cash, shares, bonds and property. There’s a significant choice of investments to choose from, so you need to understand the risks associated with each. We’ll help you to understand your approach to investment risk and determine the appropriate asset allocation for your investment goals.
Changes to keep your plans on track
As your goals are likely to change over time and also your attitude to investment risk, each year you should review how your savings and investments are growing and decide if you need to make any changes to keep your plans on track. Depending on your investments, you may even need to review your situation more than once a year.
The time horizon is important to setting realistic goals.