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How to Invest Your Money For Intermediate-Term Goals


How to invest your money for goals achieved within a 3 to 10-year investment horizon. 

Medium term goals are normally big investments such as saving for a home down payment, wedding anniversary, saving to start a family and more. In order to reach these goals, you’ll need to set aside cash in small manageable amounts on a monthly basis in well-balanced investment vehicles.

A balance between risk and return – such that we are more conservative than long-term investment options yet more risk tolerant than short-term options. Yielding a better return will make it easier to achieve the goal, yet risk cannot be isolated as it might wipe out your gains. When it comes to intermediate-term investing there is no definitive answer. It really depends on the demands and personality of the investor.

Factors to Consider

To make a decision on where and how to invest for intermediate-term financial goals, here are some of the things you’ll need to consider:

  • Deadline. If you have a strict deadline, then consider taking a more conservative approach and avoid the stress of market fluctuations. If you don’t have a strict deadline than consider how much uncertainty you can handle.
  • Uncertainty. We are talking about an estimated time or general time frame to meet the goal. This means that the goal can be moved forward if the money isn’t enough. This gives you more room to take on a little more risk and achieve a better return. However, even if you can afford to take on a little more risk for a better return – do you really need it?
  • Need. Based on the amount of time you have until the projected date, the amount of money already saved,  and the amount you regularly put away – what kind of return do you need to meet this goal. Sometimes, you may find that you don’t really need a return any better than a simple savings account.
  • Willingness. No matter how much risk you can take on, the question that will always remain is – are you willing to handle market swings? Putting your money in the stock market, for instance, means that you subject yourself to the additional stress of watching your investments go up and down.

Intermediate-Term Investment Options

The interception between risk and return yields the following investment options for medium-term investors:

1. Saving Accounts

Saving accounts are a basic and pretty boring way to save your money but not bad though. They offer convenience and the guarantee that your money will be there when you need it.

2. CD’s

Certificates of Deposit require you to keep your money invested for a specific time period, which may vary from one month, three months, six months to several years. In return, you get a better interest rate than saving in a regular saving account. Generally speaking, with CD’s, the longer you save the better return you get and thus, have penalties if you withdraw your money early.

3. Lending Club

Lending clubs are great for medium-term investors because they offer return maximization while minimizing risk. There are some great clubs out there that are offering about 12% or more, per year and are very well managed. Considering how the debt market is today, these clubs are a great place to make a good return.

4. Bonds

Investors can purchase specific bonds such as corporate or government bonds with maturity dates of 1 to 10 years. There is a bit higher risk with this option as there is no diversification, particularly for corporate bonds. To reduce this risk, invest in highly rated corporate bonds with good and stable returns.

5. Bond Index Funds

Bond index funds are offered by investment banks and are for investors who do not wish to invest directly in the bond market. There is still an element of risk with bond index funds but it is not as big. This is because the index fund spreads money across the entire bond market, which reduces the overall risk by diversification.

6. Balanced Mutual Fund

The balanced mutual fund is also offered by various investment banks in Kenya and invests in a mix of both stocks and bonds. It allows investors to spread their money across both investment options within a single fund. The aim is to find the right mix of investments in a good way to give you an upside potential while limiting the downward risk.

7. Stock Market Fund

The stock index fund invests in stocks only and offers the highest potential return on all investment options listed here. This fund allows investors to spread their risk over the entire market instead of pinning all hopes on single company stock. Funds attract a per cent management fee, which will reduce the overall potential return of the fund.

In a snapshot…

Investment Option Quick Facts Potential Market Return
Saving Account
  • Convenient
  • Very low risk, low return
2%  – 7%
Certificates of Deposit
  • Attract penalties on an early withdrawal
7% – 8%
Lending Club
  • Low liquidity
  • Possibly low risk depending on management and high return
12% -20%
  • May have a minimum investment
  • Moderate risk
9% -13%*
Bond Index Funds
  • May have a minimum investment
  • Have a management fee
8% – 12%
Balanced Mutual Fund
  • Have a management fee
  • A mix of both bonds and stocks
  • Relatively moderate risk and high return depending on the mix
Stock Index Fund
  • Have a management fee
  • High risk with high return
10% – 13%**

*Government bonds return year to date.

** NSE All-Share Index and NSE 25 Index rate of return year to date.

Strike a Balance Using Multiple Approaches

Given the above options at your fingertips, you’ll then need to bridge the gap and also strike a balance if you decide to use multiple approaches.  To do so, you’ll need to determine how much you need to have in x amount of time and the best options to help you get there.

Let’s take a hypothetical scenario to see how this can play out. Assume you want to buy a house in about 5 years. You will need about KES 5m for a down payment, but you also know that you can afford to wait longer than the necessary 5 years.

Here is what you can do:

If you are flexible with when you want to buy the house, and you’re okay with watching your account balance fluctuate in the meantime, maybe you do something like the following:

  1. Have half of your savings go into a savings account or CD.
  2. Have the other half of your savings into a balanced mutual fund, which has 60% stocks and 40% bonds.

Overall, this means that you have 30% of your money in the stock market, giving you upside potential while exposing you to some risk of loss. But, it would also mean that you have half of your money protected from any kind of drop in value. Hence, enabling you to get some of the benefits of each approach.

Just to be clear, that isn’t meant to be a recommendation and it may not be right for your specific situation. It’s just an example of how you could strike a balance between multiple approaches.

To Summarize

Investing in medium-term goals is very tricky as one needs to balance between risk and return. At the end of the day, you get what you put it – low risk translates to low return and high risk translates to the high return. The best strategy would be one that offers the highest compound consistent return with no risk of losing it all. Thus, ensure that you regularly reevaluate your goals as they are bound to change over time and make the necessary changes to your investment strategy.

Great instances to evaluate is when:

a. There is a big market upswing or big influx of cash, which places you ahead of schedule – thus giving you the option to take a more conservative approach to your investment strategy; or

b. There is a market downswing, which places you way behind schedule – in which case you may want to increase your savings to get yourself back on track.

All in all, what really matters is that you are saving enough to reach your goal, given the investment vehicle you choose to help you get you there.

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