Intermediate and Short-Term: Strategies and Recommendations for Income and Balanced-Oriented Return Objectives Only

Just as the act of putting looks simple to a new golfer, so the process of successful short-term investing seems to some investors. It looks so deceptively easy!

Investors may view risk capacity and their risk tolerance profile as one and the same. For instance, the decision to venture far out on the risk spectrum can mean losing the capital that you will need in retirement.

Risk Capacity and Risk Tolerance Differ

Risk tolerance considers more than your comfort about value fluctuations and putting capital at risk. It involves answering the question, “Can I afford to lose money now that I am close to or in retirement?”

If the answer is no, stick to safe investment vehicles and strategies.

If you’re considering intermediate and short-term strategies and recommendations and your objective is income only, don’t veer from your course a few years before retirement or after you retire.

Intermediate and Short-term Strategies and Recommendations

Let’s consider the frequently asked question, “Why shouldn’t I trade stocks for short-term or immediate-term capital appreciation?”

It’s almost reasonable to assume that equities will continue to outperform all other financial assets in the near term because they’ve done well over the past few years.

At the other end of the risk spectrum, very conservative investors may believe that the best way to reach short or intermediate-term return goals is to stay with guaranteed financial products like certificates of deposit (CDs).

Unfortunately, the short- and intermediate returns on cash and equivalents is small today.

If your investment time horizon to retirement is longer than a few years, after-inflation results of cash and equivalents are probably a losing strategy.

If you’re about to retire or you’ve already retired, discuss your situation with an experienced retirement advisor.

Run the Numbers

Investing your money to achieve intermediate or short-term income goals involves some decision-making:

• The S&P 500 index has posted positive returns approximately 90 percent of the time (in 10-year periods) for more than 30 years.

• However, equities are much less certain over a shorter time period. For instance, (in rolling annual periods) since year-end 2020, the S&P index showed losses about 20 percent of the time.

• In comparison, in three-year rolling periods over the same time, the S&P 500 index showed losses about 12 percent of the time.

• Some of the short-term downturns (especially in considering the annual windows) punished short-term investors. For instance, if you bought the S&P 500 index after the Great Recession began in 2008, you’d have shown a 43 percent loss by early 2009.

Short- to Intermediate-Term Bond Yields

In contrast, bonds show a higher likelihood of preserving your capital and generating income over narrower time periods:

• Barclay’s U.S. Aggregate Bond Index showed positive returns in each rolling three-year segment since 1986 and returned about 90 percent over rolling one-year periods. (Note that interest rates continued along a deflationary course in these years. Declining interest rates benefited bond prices.)

• During the most difficult one-year period for bonds (late 1993-late 1994), bonds suffered milder losses when compared to stocks during the period (about 3.7 percent).

• The past doesn’t predict the future, however. In a period of time in which interest rates rise, bond values could decline.

Strategies for Intermediate- and Short-Term Income Investors

Let’s assume that bond investments aren’t a solid course for short- and intermediate-term investors seeking income.

This assumption doesn’t imply that equity investments are better over a short- or intermediate investment time horizon.

If your time horizon is 10 years or less until retirement, history shows:

• Stock returns are relatively unreliable to achieve a balanced income on your portfolio.

• If your time horizon is reasonably close to 10 years, discuss adding equities as a component of your portfolio with an investment advisor.

• If your investment horizon is short- or intermediate-term, consider that equity markets have been extended, in part because of historically-low interest rates.

Saving for your financial goal with a less than five-year time horizon may involve taking some risk—but it shouldn’t be too much risk:

• Recognize the importance of the current savings rate. If you choose safer assets, you’re unlikely to achieve a relatively low rate of return.

• Qualify your specific goals and establish the time horizon. For instance, to achieve specific goals over a one or two-year time horizon (short-term) or within the next three to 10 year-period (intermediate-term), start with your financial objective and the costs associated with achieving it.

• Inflation may be a factor in achieving your goals. Consider the impact on your return, especially if your income goals fall into the intermediate-term category.

• Where will you save and invest? If you’re investing for retirement, invest in your tax-sheltered retirement accounts to avoid paying current taxes on gains. You will pay tax on capital gains and/or income if you invest in your taxable broker or bank account. Consider that you’re able to withdraw funds at any time from a taxable account without incurring penalties.

• Consider your tax bracket if you’re investing money outside of a retirement account. Municipal bonds may be an option if you’re in a high tax bracket (32 percent+).

Investments for Short-Term Time Horizons (Up to 2 Years)

If you have two years or less in which to achieve a financial goal, it’s probably not the time in which to assume excessive risk. Yet cash and savings rates are unattractively low.

If you don’t want to risk the money you’ve saved to date, i.e. by seeking extra returns available in short-term bond funds or adjustable-rate funds, let’s consider some of the safest options:

• Bank savings and checking accounts

• Money market fund accounts

• Certificates of deposit (CDs)

• Online savings accounts

Although you won’t earn high current returns on your short-term funds, you won’t subject your money to excessive risk, either.

If you’ve got more time to invest, let’s consider intermediate-term horizons.

Intermediate-Term Investment Horizons (3-10 Years)

With a little more time, you can take on a little more risk with your money. Consider investment quality bonds. These instruments often provide higher than cash yields. If your time horizon is up to 10 years, it may make sense to invest in equities (stocks) as well.

”In-Between” Investment Time Horizons (2-5 Years)

If you’re investing for the short-intermediate horizon, focus on bond funds and/or investment quality bonds that mature in two-five years.

Although it’s possible to lose capital in bond funds, selecting quality debt over short maturities should minimize your risk.

In addition, ultrashort duration funds, short-duration bond funds, short-maturity muni bond funds (outside of your tax-deferred retirement plans) can make good financial sense.

A higher tax bracket investor can keep funds accessible and growing over two to five years in this example: (1) 20 percent – 40 percent cash/equivalents, (2) 40 percent – 60 percent short-term muni bond fund, and (3) 20 percent in an intermediate muni bond fund.

If the investor wants to keep their investments growing in a tax-deferred account over two to five years, here’s a second example: (1) 20 percent – 40 percent cash/equivalents, (2) 40 percent – 60 percent short-term bond fund, and (3) 20 percent intermediate bond fund.

Longer Intermediate Time Horizons (5-10 Years)

With a little more time, you may have the ability to assume slightly more risk. If your financial advisor agrees, you may even add a small amount of exposure to equities. Keep most of your money in shorter-term bond funds and cash/equivalents, e.g.:

• Short-term (or ultra-short) bond funds

• Short-term muni bonds or bond funds

• Intermediate duration bond funds or muni bonds/bond funds

• Conservative asset allocation funds

• Moderate asset allocation funds

• Larger capitalization equity funds

Here’s an example of an investor’s five to 10-year duration taxable portfolio: (1) 20 percent cash/equivalents, (2) 20 percent short-term muni income, (3) 40 percent intermediate municipal bonds for income, and (4) 20 percent stock market index or ETF fund.

In a tax-deferred retirement account, the investor with five to 10 years to invest might include (1) 20 percent cash/equivalents, (2) 20 percent short-term bond fund, (3) 40 percent intermediate bond fund, and (4) 20 percent stock index or ETF fund.

Save More Money from Earnings to Achieve Financial Goals

Perhaps you can put a little more money now. If you’re planning to retire in the next one to 10 years, consider conserving more cash from full or part-time employment. Spend less. After you make the maximum contributions to your retirement accounts, use taxable accounts.

This simple method can help you achieve savings, income, and growth with income goals without assuming market risk. To conserve your money, invest in short-term cash/equivalents.

Impact of Costs in Intermediate to Short-Term Strategies

Investment costs can erode your returns. Pay close attention to individual bond issues. If you choose to build a bond portfolio, note that dealers typically sell these instruments net of commissions or fees.

No-load mutual funds, including short and intermediate-term bond funds, can save you money on fees.

An experienced financial advisor can help you identify low-cost strategies to maximize your income and balanced portfolio objectives. Remember: although short or intermediate-term investing might look easy, there are potential pitfalls to consider.

In an inflationary environment, or in a period in which historically-low interest rates are rising, it’s important to discuss which strategies and investments match your short and intermediate-term income or growth with income goals.