Don’t Forget To Manage Medium-Term Goals

“My daughter is getting married – the stock market is down and I need to sell some stocks to pay for the wedding.”

Hold on a minute here! You had to have some idea that this was an expense looming in the not-too-distant future.

Similarly, when the stock market is on an upward tear, you want to maximize the return on your dollars and not settle for a measly 1% in a savings account for several years.

We know about short-term savings goals such as building an emergency fund. We also save for the long-term to build up a healthy retirement nest egg. But medium-term goals often leave a big gap in our financial planning that needs to be addressed. If you don’t withdraw from your portfolio, you will likely have to borrow the money you need.

So what! You say. With lending rates so low, I can earn more in my investment portfolio than I will have to pay on any loan or line of credit. Sure, but consider this:

• You may end up borrowing a larger amount than you would otherwise. After all, you qualify for a $45,000 loan and the payments over a six-year term are not that much higher. So instead of looking for a lightly used $30,000 vehicle, you are test driving some brand new SUVs with tons more bells and whistles.
• Your investment contributions are postponed because the money is going to debt payments instead.
• The market experiences a sharp downturn, but you can’t take advantage of buying funds at a lower price because you are making debt payments.
• You are laid off from your job, your house burns down, or you unexpectedly become pregnant with twins and you still have several years before your loan is paid off.

See where I’m going with this? Medium-term goals need to be planned.

Marie’s story

I saved family allowance payments to go towards my sons’ secondary education. The money went into mutual funds, which were riding high for most of the 1990’s. One of my sons wanted to attend university in another city. We decided to use his mutual funds for the down payment on a house for him to live in with several roommates.

Related: Student House (ING)

Before the house purchase was finalized, we went on vacation. Remember, this was a time before easy internet availability and 24/7 access to financial news. When I returned to work there had just been a market correction and my funds were plummeting fast. It took a few days to redeem them because of all the panicked investors withdrawing their funds all at the same time. (I was panicking too, but for a different reason.)

Finally, I was able to cash in my funds and, thankfully, I still had the amount I needed for the down payment and closing costs.

This story is a little different because the purchase was not a planned one (sometimes I can be impulsive), but the results are still the same. My purchase could easily have been in jeopardy.

So, how do I invest this money?

Choosing the right investment for mid-term goals (3-10 years) is more complex than the easily accessible savings account for your emergency fund and the riskier equity/bond retirement portfolio, since these are goals where you typically need time to accumulate a certain sum of money – for a vehicle purchase, down payment on a home, renovation, etc.

You still want to preserve your capital, but you don’t want to lose out on growth. The more time you have, the more risk you can probably take with the right balance of stocks and bonds. As the time frame for needing the money gets shorter, you’ll want to move these assets into more price-stable, liquid investments.

Final thoughts

Often your goal is to maximize your RRSP and TFSA contributions, and make the most out of every available dollar. But don’t just invest for the long-term. Stock markets historically have a correction or major drop approximately every ten or so years.

Related: What can you do about the upcoming stock market crash?

A disciplined approach to investing recognizes the need to also plan for medium-term lifestyle needs.

• How do you feel when you’re forced to make the mandatory RIF withdrawal from your equities when the market has dropped 30%?
• Good luck telling your daughter that her dream wedding will need to be scaled down a little or, perhaps, a lot!
• Are you comfortable making debt payments for several years because you have to borrow for your large purchases?

Yeah! I know. This time it will be different.