The wise investor can separate his portfolio into long-term and short-term investments, one with an eye toward the distant future and the other with an eye toward insuring the investment funds you may need immediately is still producing more funds.

There are noteworthy differences in how the two kinds of funds are invested. Long-term investments are placed in investment vehicles that prohibit or penalize sudden or untimely withdrawals. They are designed to provide a sizable account from which children or grandchildren can draw on when they have their own financial needs.

But all investors still need funds they can access quickly. At the same time, they want those funds to be making money until such time as they need to be withdrawn. Thus, they place those funds in short-term vehicles.

Short-term investments can be as simple as interest-bearing checking or savings accounts, or can be as complex as Treasury Inflation Protected Securities (TIPS). Whatever they are, they are investment vehicles that allow for withdrawals either immediately or after a short investment period.

Advisors can assist investors in determining how they should divide their investment funds between long-term and short-term products so that they are able to access some funds quickly while others are put away for the more distant future.

Spectrem’s annual report on investors and their assets – Asset Allocation, Portfolios and Primary Providers – lists the short-term investment vehicles wealthy investors employ and what percentage of investors use which of the short-term opportunities.

 “Short-term investments can have many functions,’’ said Spectrem president George H. Walper Jr. “ It can be as simple as creating a fund for upcoming events like vacations or holidays, or it can be set aside for college. The key to short-term investments is that they often have low yields. The concept is to have your money making money in a small amount of time with little risk or few penalties.”

It is possible investors may not think of short-term investing as a way to produce interest. Advisors can explain to investors that short-term investments can serve as a failsafe for financial emergencies as well. While long-term investments, like stocks, work best when the investment is allowed to grow over time, a short-term investment vehicle is a way for investors to have a savings plan that still produces income, but can be accessed quickly without penalty of withdrawal.

According to the Spectrem report, Ultra High Net Worth investors with a net worth between $5 million and $25 million put 13 percent of their assets in short-term investments, and almost all (93 percent) have checking or savings accounts that produce small interest income. Seventy-six percent have money market funds and the mean value of those accounts is $355,000, the highest value of any of the short-term investments.

Certificates of Deposit, which are more popular when interest rates are higher, currently garner ownership from 33 percent of UHNW investors. Eighteen percent of UHNW investors have Treasury bills, and 13 percent have TIPS.

Because Certificates of Deposit and T-Bills have fixed maturity times, and are penalized if the funds are withdrawn before the maturity date, financial advisors can assist investors in planning those investments so that funds are available on a scheduled basis. This can avoid penalty for early withdrawal while also providing a calendar of investment planning to determine if they want to reinvest those funds when the vehicles mature.

Younger investors are more likely to have short-term investments, as their financial needs are perhaps more immediate. Among UHNW investors under the age of 48, 21 percent of investable assets are in short-term investments, while for investors over the age of 65, only 12 percent are in short-term vehicles.

Investors with less wealth are more likely to employ short-term investments because they are more likely to be in need of funds in the immediate future. Among Millionaires with a net worth between $1 million and $5 million, the short-term investment percentage is 17 percent of investable assets set aside for more immediate access. Again, younger Millionaires are far more likely to place funds in short term investments. Among Millionaires under the age of 36, 23 percent of investable assets are in short-term investments, and among Millionaires between the ages of 36-44, a whopping 32 percent are in short-term vehicles.

Top Takeaways for Advisors

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Wealth level and age are two predominant factors that determine whether an investor is going to want more short-term or long-term investments. Keep this in mind when first setting up a portfolio for a new client.

Some investors may not understand the difference between long-term and short-term investing, but the topic is fairly simple to explain. A bit of education can make the process of setting up a portfolio of investments easier.

 

Talk to investors about family issues that may require assets to be placed in short-term investments.  These events may include college tuition, weddings, even health-related challenges.

 

 

*According to Spectrem research, there are currently 29.8 million households with $100,000 - $1 million in net worth (not including primary residence, NIPR).  There are 9.1 Millionaire households ($1 million - $5 million net worth, NIPR), 1.21 million Ultra High Net Worth households ($5 million - $25 million net worth, NIPR) and 145,000 households with more than $25 million in net worth, NIPR. 

 

©2016 Spectrem Group