How Investors Should Navigate Short- and Long-Term Investment Goals Today

By Faron Daugs, Certified Financial Planner™, Wealth Advisor, Founder & CEO at Harrison Wallace Financial Group 

These days, it is forgivable that households have shifted focus to immediate financial concerns. In 2022, food prices jumped about 10%. Transportation and energy costs rose dramatically. Borrowing costs increased – the average new credit card APR has climbed to an all-time high. Meanwhile, people planning a house purchase saw a spike in mortgage rates push their purchasing power lower.

The Fed has begun stepping down rate increases, signaling that inflation, while still well above the Fed’s target level of 2%, is finally on the decline. This should be welcome news for investors. While market expectations and Fed forecasts are at odds on how quickly inflation will fall, economic indicators suggest that we are in a period of returning to normalcy and predictability. When we're examining our short- and long-term investment goals, normalcy is a blessing. Investors must account for volatility and unpredictability, but markets cheer predictable outcomes.

This is why the post COVID-19 pandemic economic turmoil has been so difficult for investors to navigate. Fed chairman Powell even acknowledged in recent comments that we are in a unique economic period. Unfortunately, there is no playbook for investing during a time when inflation is driven by pandemic-driven low labor participation rates and lingering supply chain issues. In 2022, investors felt the pinch in just about every area of the market as equities and bonds fell. Investors were stranded, wondering about whether to put off retirement contributions to pay down debt, or put off major purchases in the short term to obtain more favorable financing in the future. The longer inflation lingers, the more people consider whether the impact of inflation means that buying now will hedge against the possibility that prices increase over the next few years.

Investing always presents a challenge in balancing short- and long-term goals. Whether you're saving for a down payment on a house, preparing for retirement, or simply looking to grow your wealth, it's important to find the right balance between staying the course to achieve long-term future plans and keeping afloat to meet shorter term needs. Finding that balance starts with defining our goals. Here are a few actionable steps to consider and get started.

1. Have a Written Plan

The first step to balancing short- and long-term investment goals is to set clear, realistic priorities for what you want to achieve. With rising credit card rates, paying off high interest debt is paramount. We should also prioritize building an emergency fund, as unexpected costs can derail any goal, whether short or long term. Once we have a written plan that details how we will pay down debt and build an emergency fund, we can begin to plan the next priorities, which may include saving for a down payment on a house or starting an investment account for our kids’ college expenses.

Last, but certainly not least, we need to make sure we have set clear goals for retirement savings. By writing down a clear path, you can help ensure that you're making investments that support your overall financial needs.

2. Allocate Funds Appropriately

Once you've set your goals, it's important to allocate your funds appropriately. This means putting the right amount of money into different types of investments that align with your short- and long-term goals. When saving for a goal, continually review the allocations of the investments you have earmarked for those specific goals. 

For example, if you're saving for a down payment on a house in the next year or two, you may want to invest in a high-yield savings account, or a term appropriate CD. Rising interests have benefited these stable investment returns. Make sure the allocation becomes more conservative as the purchase date approaches. 

On the other hand, if you're saving for retirement, you may want to invest in a more stock focused portfolio that has potential to provide higher returns over the long term. Utilizing tax advantaged retirement accounts is generally the best way to save for this longer-term goal.

Choose the right type of account (taxable or tax-advantaged) for your investments, and understand the potential risk related to the investments. Monitor and make adjustments based on your tolerance for risk and timeframe to the goal. 

3. Tax-Advantaged Savings

For each goal, you may need a different type of investment account. For retirement and college savings, allocate as much as possible into tax-advantaged accounts, like 401ks and IRAs for retirement, and a Coverdell Education Savings Account or 529 Savings Account for college expenses.

When deciding on a retirement account, consider your own current tax situation, as well as your future tax bills. Contributions to Traditional IRAs and 401ks may offer the benefit of a lower tax bill when making the contributions, but the money will be taxed when distributed in retirement.

If you can forego the immediate deduction, then consider investing in a Roth IRA or Roth 401k. You will not receive a tax deduction on the contributions, but if eligible to contribute to a Roth retirement account, you can withdraw the money tax free in retirement. The Roth accounts have grown in popularity for retirement contributions. People who invest in Roth IRAs also tend to keep the money in the accounts longer than those who invest in Traditional IRAs, largely due to required distributions that must be withdrawn from Traditional IRAs.

When choosing an educational fund for college savings, consider how the funds are permitted to be utilized, as unqualified withdraws can lead to penalties. The choices have become more attractive, however, with increased flexibility on how funds can be used. For instance, in 2024, a portion of unused 529 plan money can be rolled over into Roth IRAs, avoiding withdraw penalties and boosting retirement savings.

Still, it is important to weigh any restrictions of an account against the tax benefit. Generally, the tax benefits will be less if your time frame is shorter. Depending on the time frame and required flexibility, investing for college in a taxable account may be preferable.

4. Diversify Your Investments

Diversification is key when balancing short- and long-term investment goals. By spreading your investments across different types of assets, you can help reduce risk and increase the chances of achieving your goals. This might include investing in stocks, bonds, real estate, and other assets that provide different types of returns and react differently to changes in the market.

For shorter term goals, investments should lean towards more conservative assets, such as money market funds, high yield savings, CD’s and short-term bonds. More growth focused investments, such as growth stocks, can be more appropriate for longer-term goals, like retirement.

It can be tempting during a period of high inflation to stretch our risk tolerance for short-term goals as we attempt to keep up with rising prices. The good news is that with some major purchases, such as a home or a vehicle, the inflation rates have started to come down off their highs. As mentioned above, with interest rates rising, some conservative, short term investment yields are fairly attractive right now. This at least gives a short-term investor a fighting chance to keep up with inflation.

While it may be tempting to stretch your tolerance for risk to chase potentially higher returns, be cautious, as doing so could put these goals at risk. I expect the stock and bond markets to remain volatile, so if your two-to-three-year goal is important (and it probably is), stick with the guarantees of a high yield savings account or CD for now. Meanwhile, market volatility in longer term retirement accounts can be easier to tolerate and overcome, as you have more time to recover.

5. Review Your Portfolio Regularly, but Not Obsessively

Finally, review your portfolio regularly to make sure you're still on track to achieve your goals. This may involve rebalancing your portfolio, adjusting your asset allocation, or making other changes as needed to ensure that your investments are still aligned with your goals.

Keep the emotion of investing out of your decision making and don’t buy into the day to day today “noise” of the market. Being a disciplined investor will give you a better chance of achieving goals, both short- and long-term.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Other Topics

Markets Retirement Financial Advisors Stocks Investing