Before you invest, you should decide on how long you intend to invest. Why? If you need to access all of your money within a few years, you should plan your strategy over that period. In general, time horizons are stated as:
- Short term - 1 to 4 years
- Medium term - 5 to 10 years
- Long term - 10 years plus
If you are investing $100,000 yet you know you will need $45,000 in 4 years, you need to ensure that you can access that amount without any penalty in 4 years time. In addition, it would be prudent to use a cautious approach with that $45,000.
It is widely stated that you should only invest into equity related funds for a minimum term of five years. Although, this is aimed at traditional long only equity based funds. Long meaning buy and hold funds, which increase in value only if the underlying shares go up in value? Indeed, there are many funds where you can invest for shorter periods. As a rule of thumb, you should plan to invest over a minimum term of 5 years if and when investing into traditional equity style funds.
If you plan to invest for less than 5 years, then you should consider funds that offer stable returns and that offer high liquidity without any back end fees or penalties (such as a typical fixed income/bond style fund).
Another example, if you were a $50,000 investor over a medium to longer-term time horizon (10 to 15 years) and needed to access $20,000 in 3 years, you should ensure that at least $20,000 is invested in very liquid funds (liquid means very accessible).
Never enter into a contractual form of investment, if there is a possibility that you may require access to your money, unless of course it is contractual form of fund that permits access.
Another general principle is that all investors should maintain at least 3 to 6 month''''s net income within some form of instant access deposit account. If you need to access money in an emergency, it could be a poor time to withdraw from your investments, and you may need to wait for around 30 days to receive your invested money. Therefore, you should always maintain an emergency fund of this amount before even considering any other form of investment.
