VOL. 10 | NO. 46 | Saturday, November 11, 2017
EMPHASIS: Financial Services
Guidingpoint’s Douglas Discusses Pros, Cons of Short-Term Investing
By JODY CALLAHAN
When folks talk about investing, they are usually referring to something for the long term: saving for retirement, stashing away money for a newborn’s college fund, that sort of thing.
Brian Douglas, principal with Guidingpoint Financial Group in Memphis, says short-term investments – those with a time frame of one to four years – come with different considerations than long-term investments. (Memphis News/Houston Cofield)
But what about those who are investing for the short term, perhaps a young couple that wants to make a down payment on a house in three years?
We asked Brian Douglas, a principal with Guidingpoint Financial Group in Memphis, to offer his thoughts on the pros and cons of short-term investing (This interview has been edited and condensed for clarity).
Q: What exactly is short-term investing?
Brian Douglas: “Short term is really anything under three years. … You do want to try to see the full equity cycle, though, which is going to be anywhere from three to 10 years. …
“Time frames are different, so you may have some goals that are coming up. It may be a down payment for a house. It may be the start of a college education for a child. It could be the first year of your retirement. (Something) that is one to four years out.”
Q: What types of investments are usually considered “short term”?
Douglas: “So you could do something as simple as your personal emergency fund, dollars that you don’t need every day but something that you need to have quick access to. First year of college. If you’re paying for (later) years, we’ve got a little time to be able to do that. Down payment on a house. (Or) If you’re retiring soon, you may want to have the first couple of years in something that’s less risky, because you’re going to need those dollars as income.
Q: What should short-term investors be aware of?
Douglas: “There are three things to look at. One is to simplify. You want to reduce the complexity of whatever you’re investing in. You may not want to invest outside the U.S. You may not want to do something that has some strings (attached), or isn’t as liquid as you think it might be.
“(Second), you also want to reduce the risk. Equity cycles tend to run anywhere from three to 10 years, give or take. You’re going to have ups and downs in those equity cycles. A lot of people talk about some type of standard return they’re going for based on their risk tolerance, whatever that magic number is for them. But we’re only dealing with a portion of that equity cycle. We’ve got to reduce that risk. A lot of times, it’s going to be outside of equities altogether to be able to do that.
“And thirdly, align with your time frame. You may look for specific investments that line up with that time frame. If you’re going to buy a house and you know you’re going to buy that house three months from now, you may look at something like a three-month certificate, just a CD. If it’s three years from now, that may be something more appropriate for something like a bond or a (municipal) bond, something that has that maturity right there where you’re going to need it. Or even another bond that would mature exactly when you need it or shortly before.
“Simplify the complexity, reduce the risk and align the time frame to match what you’re really looking for.”
Q: Let’s imagine a young, married couple, just starting out in their careers, who want to buy a house in three years. What advice would you offer?
Douglas: “Knowing that it's a three-year time frame, you can look for something as simple as a certificate of deposit, knowing that it’s something you have immediate access to. That magic house may come along before that three-year period. But if you know that that’s a hard date, you may look at something that’s a little longer. Right now, I don’t know if I’d tie into a three-year certificate, because right now, rates are historically low. If we get back to the mean, they should go up at some point.
“You can look at a municipal bond … or even an individual municipal bond that has an expiration that’s in that three-year time frame. You can do that with any maturing security that has a set date within your time frame that’s not an equity-type holding.
Q: What lifestyle changes would such a couple need to consider?
Douglas: “The first thing would be to sit with them and work on a budget. What fits them? Are they renting now? If they are, how much extra could we put into (savings)? Also, what does that eventual house note look like compared to rent today?
“So let’s use an example. Let’s say they are in a specific price range for a home and the monthly note is going to be $1,000. Today, they’re in an apartment and their rent is $700. Obviously, if we’re at a point where we can build up and save that extra $300 a month as if we were paying the mortgage payment, we can put that extra $300 a month toward the down payment. And if we buy the home, our expenses haven’t changed. It’s the same dollars, they’re just being allocated slightly differently. With a young couple, we’d work up to that point to make sure the dollar amount fits within their budget.
“Sometimes, saving (when) just out of college is a new concept, to be perfectly honest. Sometimes, with some of my younger clients, we’ll do full financial planning with them. Sometimes, helping them open up their eyes to where they’re spending their dollars helps.”
Q: What are the pros and cons of short-term investing?
Douglas: “Pros are relatively low risk depending on how you’re investing, a good way to meet very short-term goals.
“Cons are you’re somewhat limited to what you’re investing in because of the risk and the liquidity needs.
“Right now, short-term rates are not very high. If we go back and look 15 years ago, (with) short-term investing we could get you 4, 5, maybe even 6 percent return on that. We’re certainly not seeing those today. We’re having to settle today for a little bit lower return on those short-term dollars than we have historically. Depending on what you have it in, anywhere from 1 to 3 percent, really.”