One of the reasons that planning for your retirement can be so intimidating is the sheer wealth of investment options from which you can choose. Every financial advisor will recommend starting your pension pot as soon as possible, but what should you do with that pot? Where do you invest it? And why?
One option is to try short-term investments as a way to grow your money. Growing your money is key to providing for your retirement as it reduces the impact of inflation on your savings. Additionally, it should give you more money at retirement age than you originally invested. So how can short-term investing help you do that?
Here, we look at the upside to short-term investments as well as the downsides. As always, you absolutely must consider the benefits and risks in relation to your specific circumstances. Your financial situation will be very different from anyone else’s. As a result, some investment strategies will be unsuitable for you. Ensure that short term investing is a strategy that works for you and is not more likely to leave you worse off.
The upsides to short term investing
These are the plus points to implement a short term investment strategy to your pension fund portfolio. For some, these advantages will be a substantial bonus; for others, they will be minimal.
Provide for retirement in a shorter time
Perhaps most obviously, short-term investments provide you with a return in a shorter amount of time. It does not always follow, however, that shorter-term investments have higher returns than longer-term investments. However, if you have a shorter time available to you until your retirement date, short term investments can be an effective way of growing your money. Of course, as with any investment, the value of our investment can fall as well as rise. But not having to wait for a long time to see that return is an attractive plus point.
Make up shortfalls
Choosing high return, short term investments may be advantageous if you have left your pension planning until later in your life. Plus, if you anticipate your pension pot falling short of where it needs to be, those short term investments with high returns may help make up the gap. However, just because investments are short term does not mean that they will be either high return or risk-free. Weigh up every potential investment in terms of risk vs return as well as its investment timeline.
Dynamic investment strategy
A big plus to short-term investment strategies is that it is a dynamic one. The upshot of that is you are a far more agile and nimble investor. You can take advantage of many investment opportunities as you have not locked away your cash in other longer-term investments. Reinvestment risk is much higher with longer-term investments that need to lock your money away to see any form of meaningful return. It means you may have to miss out on some excellent purchases that offer favourable returns.
The downside to short term investing
Of course, no investment strategy is without its downsides. Short-term investing comes with several risks, of which you must be aware.
Less time to retirement
If you are embarking on this strategy to make up any shortfalls in your pension pot with a retirement day looming, you have less time to make up for any losses. While short-term investing may make you a very dynamic investor, you do not have the luxury of time. Shorter-term investments can be risky, depending on what exactly they are. As a result, the chance of losing money on your investment can be higher. Your pension pot will therefore be worth less than if you had chosen to stay as you were. In fact, the closer you are to your retirement date, the more financial advisors advocate safer asset classes.
Short term investment risk
It is not always the case, but some shorter-term investments can come with a higher risk. Higher risk investments will often be the ones you are attracted to when looking to make up shortfalls in retirement funds. You will be trying to identify investments with a higher return. That higher return is often at the expense of risk - thus making it more likely that your investment will lose money. That is by no means a given, but it is something to take on board before embarking on this strategy.
One of the reasons financial advisors recommend investing in a pension scheme early on is market volatility. By investing early, you are far less vulnerable to market movements. However, if investing with a short-term strategy, you are highly susceptible to market fluctuations. High volatility makes many investments far more likely to decrease in value. The result? Your investments will be worth less, and your pension shortfall will be more significant.
Short term investments and retirement - key takeaways
The potential upsides to short-term investments make for some pretty compelling reading. Perhaps most notably is how short term investments make it far more possible to take advantage of more opportunities. However, that dynamism does come at a price. Not only does it mean you cannot ride out any market crashes as other longer-term investments can, the administrative burden is that much more. You have to stay on top of all your short-term investments while identifying more for the future. As a result, when it comes to retirement, any shortcuts are not always what they are cracked up to be.