Asset Allocation for short term?

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alex123711
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Asset Allocation for short term?

Post by alex123711 »

Just wondering what the asset allocation would be recommended for investments with shorter or potentially shorter time horizons? E.g if you may need the money within 3, 5, 7, 10 years etc.
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David Jay
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Re: Asset Allocation for short term?

Post by David Jay »

Most here would suggest that no funds needed within 5 years should be in stocks. That covers the first two periods.

Above that, asset allocation is highly personal. One needs to select an asset allocation such that they will not sell out after a 50% market decline. For comparison, the March sell-off was around 30%.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
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alex123711
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Re: Asset Allocation for short term?

Post by alex123711 »

David Jay wrote: Tue Jul 07, 2020 7:31 pm Most here would suggest that no funds needed within 5 years should be in stocks. That covers the first two periods.

Above that, asset allocation is highly personal. One needs to select an asset allocation such that they will not sell out after a 50% market decline. For comparison, the March sell-off was around 30%.
So 5 years worth of expenses should be in cash/ bonds?
averagelonghorn
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Re: Asset Allocation for short term?

Post by averagelonghorn »

To me a big question is, how sure is the expense? If you know for sure you need $x.xx in 5 years, it belongs in fixed income. If instead it is just a "nice to have," no problem having some or most in riskier investments..... I used to use a short, medium, long mental accounting system for us; Short was always savings, MM, or CDs; Medium was usually stocks, Long was always a balanced portfolio. I'm older and closer to retirement now; Medium has mostly gone into our house or car purchases; so now I have mostly short and long term needs. Medium fund worked very well for us in our late 30s to late 40s; but it was truly a situation of "we'll see what we have when we need it and throw that mostly towards stocks." situation; we knew we'd have to adjust to the situation as it played out. Worked for us; might not work for you; I'd prioritize good short term (emergency plus for sure soon expenses) and Long Term (probably retirement) over those planned 5-10 year expenses; those have a way of being unpredictible.)
averagelonghorn
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Re: Asset Allocation for short term?

Post by averagelonghorn »

Oh, and as someone who never had to plan for college expenses, I'm woefully unqualified to opine on those too much; and it is extremely variable; but those; I'd do something like 60/40.
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spdoublebass
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Re: Asset Allocation for short term?

Post by spdoublebass »

As stated above, it kind of depends on what it's for.

I have an AA that I invest 20% in stock for something in 7 years, but If I'm short, it's not life or death I don't have to sell.

I have another account in all safe investments (CD's, Bonds, Etc.) for a vacation I promised my wife net summer. I don't want to lose that money and I need it to stay safe.
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David Jay
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Re: Asset Allocation for short term?

Post by David Jay »

alex123711 wrote: Sun Jul 19, 2020 10:25 pm
David Jay wrote: Tue Jul 07, 2020 7:31 pm Most here would suggest that no funds needed within 5 years should be in stocks. That covers the first two periods.

Above that, asset allocation is highly personal. One needs to select an asset allocation such that they will not sell out after a 50% market decline. For comparison, the March sell-off was around 30%.
So 5 years worth of expenses should be in cash/ bonds?
Yes, even if you think you can stand being 100% stocks, you need to move assets to stocks/cash/CD if those assets are to be spent in the next 5 years.

If you have a clearly dated use (say: child entering collage in 3 years...), a CD for that duration (3 year CD) makes great sense. If you are unsure (buying a house when you find the property you want) then I would recommend a bond fund for liquidity.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
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avenger
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Re: Asset Allocation for short term?

Post by avenger »

I have one asset allocation for all needs: emergency, car, retirement, etc. I’m 40 years old and have a 70/30 allocation, somewhat more conservative than I would have if I just was thinking of retirement.

Your mileage may vary.
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gr7070
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Re: Asset Allocation for short term?

Post by gr7070 »

alex123711 wrote: Sun Jul 19, 2020 10:25 pm
David Jay wrote: Tue Jul 07, 2020 7:31 pm Most here would suggest that no funds needed within 5 years should be in stocks. That covers the first two periods.

Above that, asset allocation is highly personal. One needs to select an asset allocation such that they will not sell out after a 50% market decline. For comparison, the March sell-off was around 30%.
So 5 years worth of expenses should be in cash/ bonds?
I guess that's one potential way to look at it.

I look at my retirement investment as one separate AA. Since I'm still accumulating I don't look at or care how many years are in fixed income, and none is in cash. It's just at my AA of XX:YY.

Were I in deccumulation I'd probably have some semblance of how many years expenses is in fixed income, or maybe even short term TIPS or other short/more secure vehicles. Though, I think that number would largely be a product of my AA more than a conscious view of years of expenses.

For savings/investments for non-retirement I look at that allocation based on what the intent is and when the funds are likely to be needed. This is what I thought you were asking in your OP.

For me this would be wholly separate from retirement monies and that AA. Some take a different approach.

That 5 year minimum time-frame for equities is a very common view throughout the financial industry. It, largely, has to do with what's the typical loss in value in any 5-year period.

As mentioned above AA is very personal. Like retirement allocation, one could self-justify just about any approach they wanted to take whether it's a 1, 3, 10+ -year term.
rkhusky
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Re: Asset Allocation for short term?

Post by rkhusky »

The answer depends on how much money you have and how critical the timing of the expense.

If you have so much money that a 50% drop wouldn’t affect the payment of your expense, then you don’t need a separate bucket.

If you can delay the expense for several years or the expense is optional, then you don’t need a separate bucket.
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vineviz
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Re: Asset Allocation for short term?

Post by vineviz »

alex123711 wrote: Sun Jul 19, 2020 10:25 pm
David Jay wrote: Tue Jul 07, 2020 7:31 pm Most here would suggest that no funds needed within 5 years should be in stocks. That covers the first two periods.

Above that, asset allocation is highly personal. One needs to select an asset allocation such that they will not sell out after a 50% market decline. For comparison, the March sell-off was around 30%.
So 5 years worth of expenses should be in cash/ bonds?
Well, not necessarily.

“5 years worth of expenses” isn’t quite the same thing as “”you may need the money within 3, 5, 7, 10 years”.

The former sounds like an ongoing occurrence, whereas your original question sounds more like a potential one-time expense with uncertain timing.

Those scenarios could demand different planning approaches.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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