Most of us set personal and professional goals for ourselves and understand the importance of establishing time frames to reach them. Investments are no different! Investment horizons and cash needs come in various ranges, and goals-based wealth management employs asset allocation to allow you to reach savings goals simultaneously.
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Short-term goals are best met in cash and cash equivalent investments with little to no investment risk or risk of losing principal. This money generally is expected to fund a goal in less than five years and includes an emergency reserve. A typical emergency reserve holds three to six months of income that would be used to cover non-discretionary expenses should income be disrupted for any reason such as job loss or illness. Account types well suited for short-term goals include savings accounts, money market accounts, certificates of deposit (CDs) and short-term bonds such as Treasury Bills.
Medium-term goals generally include liquid investments needed to fund goals five to 10 years out. Some examples include college funding or a future home purchase. This intermediate time horizon allows an investor to take advantage of conservative to moderate growth opportunities in the market. Some suitable options for medium-term goals include after-tax investment accounts, 529 Plans and Education IRAs invested in a diversified basket of equity and fixed income funds dependent on proximity to your goal’s expiration date.
Long-term goals include cash needs that are more than 10 years away, like retirement and legacy planning. This time horizon allows investors to utilize an aggressive investment approach dependent upon personal risk tolerance and other factors. A reasonable savings rate for this category can be between 10-15% of income, subject to individual circumstances. Investment tools appropriate for achieving these goals are employer retirement plans, traditional or Roth IRAs, after-tax investment accounts and trusts.
What is the logic for coupling differing levels of investment risk with the time horizon of your financial goals? Historical data shows that over time, the range of returns in a balanced portfolio of different investments, such as cash, equities and bonds, becomes more condensed as we look at one-, five-, 10- and 20-year rolling periods. While intra-year declines in non-cash investments can be significant, the market historically has rewarded disciplined investors who stay the course with their strategy and maintain a long-term perspective.
Goals-based wealth management and financial planning are a great way to ensure that you are saving enough toward all your goals and making the most of the one resource we can’t make more of: time. Our team is ready to help create a personalized goals-based financial plan for your unique financial goals.