Why do we invest? For most of us, the answer is that we put aside money today to help ensure that we have a more comfortable and profitable tomorrow. By its very nature, investing requires a long-term mindset. When we design our retirement portfolio, we usually do so knowing that the gains we earn over the next few decades won’t be immediately available or useful to us, but they will be there when we need them the most. To this end, it can be helpful to set investing goals that center upon specific time horizons. Here are a few ways to get started and considerations to keep in mind.

The Relation Between Risk and Time

As a general rule, the longer you have until retirement, the riskier you can afford to be with your investments. Why? If you have plenty of years to ride them out, the inevitable ebbs and flows of the market won’t feel as bumpy. However, if you’re a late investor and only have a short amount of time to retirement, you’ll want to be more risk-averse in your choices, as you don’t have the luxury of time to watch the highs and lows even out into a smooth uptick.

Keep in mind that what is appropriate when you’re years from retirement will likely require some tweaking as you near retirement age. For instance, aggressive growth stocks might make sense when you’re in your early 20s. In your late 40s, however, you may want to start adjusting your risk comfort level and take a more conservative savings approach. The same applies if you are currently investing in your employer’s stock ownership plan. While this can be a valuable company benefit, be wary of putting all of your eggs in that basket. What happens if you’re months away from retirement and a market crash occurs and takes the value of your company down with it? Suddenly the retirement you’ve been looking so forward to is postponed until you can get back on your feet financially.

These scenarios help explain why you should work with your financial advisor to develop an investment portfolio that is tailored to your individual timeline and investing goals. Taking this proactive step can help ensure that you are allocating your assets appropriately and aren’t surprised by any turn of events.

Choices for Short-Term Gains

If you’re strictly investing to gain in the short-term, you’ll want to set your focus on specific types of accounts. In general, a short-term investing timeline is one that expects to see gains within five years or less. In this case, investing in the stock market might not be the ideal course of action, as a drop in the market could negatively affect your holdings and be too significant for you to recover in time.

As an alternative, you could allocate your funds as cash, placing them into conservative investments including money market accounts or certificates of deposit (CDs) with a short-term focus. A savings account is also a viable option in this case.

Setting Intermediate Goals

While short-term investing goals are those that center on a five-year or less timeline, intermediate goals are usually set to five or 10 years down the road. If you’re working with this timeline, you can handle a small amount of the volatility that characterizes the stock market. In particular, high-performing stocks and bonds can help grow your portfolio value, as will balanced mutual funds.

Reaching Long-Term Goals

Long-term goals are those that reach 10 years or more into the future. This is the type of time horizon you’re working with when you first sign up as a 20-something looking to create a retirement portfolio. With enough time to successfully navigate and weather a market setback and still recover on top, stocks are a wise choice here. Though you may see your numbers drop here and there, they offer the potential for the greatest reward and payout and especially if your sights are set more than a decade into the future, it’s a journey you’ll want to stick with.  

Investment Options to Help You Meet Your Short and Long-Term Goals

In response to the myriad timeline goals that investors have, the financial services industry has created a few flexible investment types to help people plan smarter for their future and avoid a setback caused simply by poor timing. If you’re still struggling to understand how timelines factor into smart saving, it’s important to know that in the stock market, everything could change in a matter of seconds. As such, it’s important to have up-to-the-minute knowledge about the stocks, bonds and other funds that comprise your portfolio. To help, there are also industry experts who help investors time their investments strategically to ensure they don’t fall behind.

There are also accounts designed to help investors ace their timeline goals. Here are a few top choices.

Target-Date Funds

As their name implies, these mutual funds are designed around a specific target date. When that date occurs, the asset mix is reevaluated and adjusted based on the investor’s goals at that new point in time. For the most part, investors use target-date funds as retirement vehicles, adjusting their level of risk from high to low as their near their last day at work.

For instance, when you first begin your career, you might have a portfolio mix that is centered primarily on stocks, with just a few bonds and cash to supplement it. Yet, over time, that balance shifts and as you age, you have less money in stocks and more in cash or bonds.

Education Savings Accounts

Another reason people invest, besides to save for retirement, is to stock up cash for their children’s college tuition. If this is a timeline goal for your family, you can work with your financial advisor to set up an account designed strictly for this purpose. The most common type is a 529 Plan, designed around a mix of mutual funds.

Similar to how a target-date fund operates, most education savings accounts are designed to be accessed at a particular date in the future. As that date nears, the asset mix moves slowly and strategically from being risky to conservative to ensure there are adequate funds available to draw from. There are usually automatic adjustments made periodically based on the market’s performance to ensure that, even if it crashes, it won’t negatively impact the savings account so much that tuition, room and board, books and more aren’t covered.

Ultimately, investing requires planning. That holds true whether you’re a first-time investor or have been at it for decades. It requires you to think ahead, even if that’s only a few years down the road, and reevaluate why you need the money, what you plan to use it for, and what is the best course of action for you to save it. If you can answer questions around both your short and long-term financial goals, you’ll be on your way toward taking that first step to a confident investment.