Very short-term financial goals, such
as buying a home within the next year or two or sending
your high school senior to college, call for an allocation
strategy focused on capital
preservation. That means keeping most of your money
available and safe in high-quality fixed-income investments
and insured accounts.
If you don't want to give up all the growth potential of
stocks, you might keep a small portion of your portfolio
allocated to that asset class. However, you run the risk
that you'll have to redeem your shares at a loss if the
market goes down. You can manage this risk to some extent
by deciding ahead of time that you'll sell when a stock
increases or decreases in value by a fixed amount, say
20%.
The extent to which cash
equivalents — which are usually very safe and
often even insured — bonds, and stocks may be represented
in your short-term portfolio depends not only on how soon
you'll need the money, but also on how long the money needs
to last.
For instance, if you're making a one-time payment — such
as a down payment on a house — you'll want to allocate
for maximum liquidity, perhaps exclusively in cash equivalents
such as CDs and T-bills that are scheduled to mature when
you need the cash. However, the picture may change if you'll
be drawing on the assets over a period of time — over
the course of your child's college career, for instance.
Then you may want to allocate the money you'll need up
front in insured investments, and spread the rest among
longer-term bonds, and perhaps even in some stock.
Keep in mind that a short-term allocation model will provide
little, if any, insulation against the eroding effects
of inflation and taxes on your portfolio over the long
term.
Professor
Roger Ibbotson, Yale University, chairman and founder
of Ibbotson Associates
Professor
Roger Ibbotson, Yale University, chairman and founder
of Ibbotson Associates
