There’s no one-size-fits-all approach for meeting your investing goals. A strategy that works for retirement savings could be a poor fit for a home down payment or your emergency fund.
Let’s take a look at some basic investing strategies for short-, medium- and long-term goals. It’s all a matter of balancing your tolerance for risk, the returns you expect and your liquidity needs.
Best Investments for 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 next apartment 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 risk losing any money or being unable to recoup an investment before you need the cash. That means you’ll want decent liquidity: The ability to get your cash without 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 coin—that’s why you can have confidence you’ll have all of the money you need when you need it.
- Average annual rate of return: 0.05%
- Advantages: High liquidity, low risk, deposit insurance
- Disadvantages: Low rates of return, potential limit of six withdrawals a month
Savings accounts are the perfect parking lot for cash you need and can’t afford to lose. They’re available at banks and credit unions, and online banks.
With brick-and-mortar banks, you’re looking at a pretty low rate of return. The Federal Deposit Insurance Corp. (FDIC) clocks the current average savings account APY at around 0.05%. If you’re willing to use an online bank and forego the in-person banking experience, you can score a higher interest rate with an online savings account, which averages around 0.50% APY.
Neither average return is high enough to fend off inflation over the long term, but they do ensure you see some return on your investment.
Cash Management Accounts
- Average annual rate of return: 0.25% to 0.35%
- Advantages: Highly liquid, paper checks and debit cards may be available, better APYs
- Disadvantages: May not have wire transfer capability
Cash management accounts combine the features of checking and savings accounts in one place. They’re usually offered by non-bank financial institutions—like online brokerages or robo-advisors—as a value-added service, but you don’t have to be a client of these sorts of platforms to open a cash management account.
The flexibility they offer may make them ideal for those looking to earn a higher rate of return with no limits on the number of withdrawals made per month. Some of them offer higher levels of FDIC insurance than you can get with conventional bank accounts.
Certificates of Deposit
- Average annual rate of return: 0.20% to 0.70% (one-year CD)
- Advantages: Higher yields than most savings accounts with same low risks, built-in incentive to keep your hands off the cash
- Disadvantages: More illiquid due to early withdrawal penalties, lower rates of return than more liquid high-interest online savings accounts
If you have a tendency to pull money out of your savings accounts and would like more incentives to leave your money be, a certificate of deposit (CD) might be just the right short-term investment.
CDs are time deposits: You commit your money for a given term—anywhere from one month to five years—and you get your money back plus interest when the CD matures. This means CDs are less liquid: If you want to withdraw money early, you’ll generally owe a few months of interest as a penalty.
Best Investments for Mid-Term Goals
If you’re looking to invest with a time horizon of one year to five years, your best options are those that give you a little more upside. That means taking on a bit more risk in some cases, but you’ve got to give some to get some.
Short-Term Bond Funds
- Average annual rate of return: 2% to 3%
- Advantages: Higher returns than bank deposit products, potential tax-free income on certain funds, highly liquid
- Disadvantages: Fund screening and selection can be cumbersome
If you’re comfortable with slightly more risk than you get with bank deposits, check out short-term bond funds. Available as either exchange-traded funds (ETFs) or 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 federally insured, meaning you can lose money you invest, especially if you aren’t careful when selecting funds. To minimize risk, choose funds featuring high-quality, investment-grade corporate and government bonds. Be sure to compare both returns and expense ratios when deciding between funds.
A Diversified Index Fund Portfolio
- Average rate of return: A portfolio with 20% or 30% stocks and 70% or 80% bonds averaged annual returns of about 7% from 1926-2019, according to Vanguard
- Advantages: Good liquidity, more exposure to stocks may provide more upside
- Disadvantages: You can lose principal in a down market; fFund screening, selection, rebalancing and tracking can be cumbersome
A medium-term time frame allows you to consider the possibility putting money into a mix of stock index funds in addition to bonds, which can enhance your returns. Equity index funds can hold hundreds or even thousands 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. That said, in Vanguard’s modeling, portfolios with 20% to 30% stock holdings had negative returns roughly the same amount those with 100% bond holdings did.
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 performances. If you like the idea of investing in low-cost index funds but don’t want the hassle of managing the accounts or research yourself, consider a robo-advisor that will handle the task for you, in exchange for an annual management fee.
Best Investments for Long-Term Goals
Long-term goals are at least five to 10 years in the future. They’re usually substantial milestones, like your child’s college education or retirement, requiring focus and planning. Luckily, an extended time horizon gives you plenty of scope to weather the ups and downs of the market and take on more risk. Most of these investment strategies involve variations on the diversified portfolio of index funds covered in the previous section.
Tax-Advantaged Retirement Accounts
- Average rate of return: A portfolio of 60% stocks and 40% bonds has returned an average of 9% annually from 1926-2019, according to Vanguard
- Advantages: Tax benefits help your money compound more effectively, potential for higher returns with a stock-based portfolio
- Disadvantages: Potential 10% penalty plus any applicable taxes on most withdrawals before age 59 ½
Nearly everyone needs to save for retirement, and a tax-advantaged retirement account is the place to do it. Unlike taxable investment accounts, individual retirement account (IRA) or workplace retirement plans like a 401(k) come with valuable tax benefits. You’re guaranteed tax-free growth while funds stay in your account, saving you big on capital gains taxes.
With traditional accounts, you generally deduct ay contributions from your taxes the year you make them—then after age 59 ½, you pay income taxes on withdrawals. If you pick a Roth account, you fund it with money you’ve already paid taxes on, and withdrawals are tax-free.
For more on how you should save money for retirement, including potential portfolio breakdowns, check out our guide to retirement savings. If you want a set-it-and-forget-it solution, consider target date funds or robo-advisors.
- Average rate of return: A portfolio of 40% stocks and 60% bonds has returned an average of 8.1% annually from 1926-2019, according to Vanguard
- Advantages: Potential for significant market upside, family members and friends can make gift contributions
- Disadvantages: Penalties if funds aren’t used for educational expenses
If you’re saving for educational expenses, 529 plans are one of the best investments you can make. You can start one even before your children are born and invite family members to contribute as well. You’ll also benefit from tax-free growth of what you invest, and your child won’t ever owe taxes on the money as long as it’s used for a qualified educational expense. Depending on your state, you may even receive a break on your state income taxes if you invest using its plan.
With 529s, you’re generally able to build your own portfolio or choose from a target college start date fund. While you can be relatively aggressive with a 529, you’ll probably want to be a little more conservative than you would with a retirement account, given your longest timeline is usually 18 years.
Taxable Brokerage Account
- Average rate of return: A portfolio of 80% stocks and 20% bonds has returned about 9.7% on average from 1926 to 2019, according to Vanguard
- Advantages: With the right account provider, there are few limits on the types of asset classes available to invest in
- Disadvantages: No tax benefits for your investing dollars, non-trivial potential for loss of principal
If you’re investing for a long-term goal outside of retirement or a child’s education, you’ll want a taxable investment account. With online brokerage accounts, it’s entirely up to you how and when to invest your money—your asset allocation entirely depends on your timeline and the level of risk you want to take on.
While most financial experts still recommend you invest most of your money in low-cost index funds, you might decide to devote a small part of your taxable investment portfolio to individual stocks or more speculative, high-risk investments, like cryptocurrency. Be sure to do your research on any new investment, particularly those related to individual stocks or alternative investments, and keep an eye out for account-related or trading fees.
As with other goals, if you’d prefer a more hands-off approach, you can open a taxable investment account with a
robo-advisor that manages your money for you.