WHAT IS 'MEDIUM TERM'
Medium term is an asset holding period or investment horizon that is intermediate in nature. The exact period of time that is considered medium term depends on the investor’s personal preferences, as well as on the asset class under consideration. In the fixed-income market, bonds that have a maturity period of five to 10 years are considered to be medium-term bonds.
A day trader who seldom holds open positions overnight may consider a stock that is held for a couple of weeks as a “medium term” position, whereas a long-term investor may define medium term as a holding period of one to three years. Similarly, homeowners may regard anything less than 3 years as a medium-term horizon when it comes to real estate.
Determining an investments horizon, or term, is often based on the intention behind the investment more than the investment itself, such as when the funds will be used for other goals, or whether a lump sum or an income stream is the desired result. The most common terms are generally considered short, medium and long.
Though the term does not necessarily denote a specific length of time, most consider anything below one years to be short-term; from three to Three years as medium term; and anything beyond 10 years to be long term. Since these timeframes are considered flexible, what may be a medium-term investment for one person may feel like a long-term investment to others,
Risk Tolerance, Return Rates and Term Lengths,
Generally, the sooner you need to access the invested funds, the lower the associated risk. For example, if you intend to purchase a car within the next two years, it is often wise to invest conservatively in mechanisms such as traditional savings accounts of a CD with an appropriate time until maturity. Since the funds are required soon, volatility in higher risk markets may actually prevent the goal from being reached.
Longer-term goals, such as retirement savings with over 20 years until retirement, can generally afford more risk. Since the funds will not be required for quite some time, the account can withstand certain market fluctuations in hopes of bringing in higher returns early. As a person begins getting closer to retirement age, the assigned time horizon may shift from long-term to medium term, prompting a move toward more conservative investments.
There are two basic requirements for a company to classify an investment as short-term. First, it must be liquid. An equity listed on a major exchange that frequently trades is qualified. U.S. Treasury securities are also very liquid. Second, the management must intend to sell the security within 12 months. A bond that matures within that time frame is also included.
Medium-term goals often look for a balance between risk and return, being more conservative than long-term investments, but more risk tolerant than short-term options. Medium-term investments may include various bonds with maturity dates between three and 10 years.
How to invest for medium-term goals
Now THIS is where it gets interesting.
When it comes to goals that are 3-10 years out, you have a number of options.
You could invest at least some of the money you’re saving for these goals, with the hope that a better return will make them easier to achieve. Of course, the flip side is that investing the money may actually make the goal HARDER to achieve if the stock market happens to go through a rough patch. After all, with a shorter time frame you have less time to make adjustments if you don’t get the return you expected.
The truth is that there is no definitive answer when it comes to investing for medium-term goals. It really depends on the specifics of each situation, and even then your personality as an investor matters too.
So instead of telling you what to do, here are some factors you should consider as you make your decision.
What type of uncertainty are you dealing?
In researching this topic I came across a great discussion in an online forum where one person talked about two different types of uncertainty you might have with these medium-term goals:
Type 1 – You’re uncertain about the exact date on which you will NEED the money. One good example of this is an emergency fund. You don’t know exactly when that need will arise, but when it does you’ll need the money immediately.
Type 2 – You would like to achieve the goal within some general time frame, but it could be pushed off if needed. A good example might be buying a house. Maybe it’s something you’d like to do within the next few years, but you could always continue renting if needed without any real negative impact on your life.
For Type 1 goals where you know that you will need the money at some specific point in time, even if you don’t quite know when that will be yet, it makes sense to be more conservative. Better to know your money will be there when you need it than to reach for a slightly higher return.
Do you need better returns?
Based on the amount of time between now and when you want to reach your goal, the amount of money you’ve already saved, and the amount you’re regularly adding to that savings, what kind of return do you actually need in order to reach your goal?
It may be that you don’t need anything better than what you can get from an online savings account or CD. And if that’s the case, is it worth reaching for something better at the risk of not actually hitting your savings target?
Medium Term Investment