30 Day Investing Challenge, Day 20: What Should You Invest In For Medium Term Goals?
As I said in an earlier challenge, many times financial professionals lump medium term goals into either the short or long term categories (depending on the timeline). However, there are so many investment options that are perfect for goals hovering around the 5 year mark that I like to group these goals differently. Here are some of my favorite types of investments for goals ranging from 3-10 years:
50/50 Stock/Bond Split
A great and simple way to invest your money in medium term goals is with a 50/50 stock/bond split in a brokerage account. The equal balance of stocks and bonds allows your money to grow, but also stay safe from market volatility. The reason this is so easy is you can simply put half your money in a total stock market fund and a total bond market fund. If you’re at Vanguard this would be a split between VTSAX and VBTLX if you have a minimum deposit of $3000; or VTI and BND if you have less than $3000 to invest. There are also equivalent funds at Fidelity and Schwab. I recommend using this strategy only if your timeline is 3-10 years long because of the stock allocation. Stocks are highly volatile over a short period, but if you give them enough time they’ll trend upwards.
I Bonds
A series I bond is a non-marketable (cannot be bought or sold in the stock market), interest-bearing U.S. savings bond that earns a combined fixed interest and variable inflation rate, adjusted semiannually. Series I bonds are meant to give investors a return plus protection from inflation and are therefore considered a low risk investment.
What To Watch Out For
I bonds have some strings attached:
You must buy and sell them at TreasuryDirect.gov.
The minimum to purchase is $25 and the maximum is $10k.
After buying you can’t sell them in the first year without incurring penalties.
If you sell them before 5 years, you’ll give up the last 3 months of interest earned.
How They Work
I bonds earn two types of interest: fixed rate and inflation rate. The fixed-rate is announced every May and November and is then applied to all I bonds issued during the following six months. It also compounds semiannually and does not change throughout the life of the bond. The inflation rate is also announced in May and November and is determined by, you guessed it, inflation. This rate is applied every 6 months. Sometimes it’s 9% like back in 2022, but other times it can be 2%. This makes it difficult to forecast the bond’s value over several years and why it’s not a great long term investment.
Treasury Inflation Protected Securities (TIPS)
Treasury Inflation-Protected Securities or TIPS are a type of Treasury security issued by the U.S. government. TIPS’s value are linked to inflation to protect investors from a decline in the purchasing power of their money. Interest rates on TIPS are fixed at the time of issuance, but the interest payments keep up with inflation.
What To Watch Out For
TIPS have some strings attached:
If you purchase them via a mutual fund you’ll pay management fees, however to avoid fees you can buy them through TreasuryDirect.gov.
The minimum to purchase is $100.
You must buy them in 5, 10, or 30 year increments.
If inflation goes down your interest payment will be less.
How They Work
TIPS are a popular asset for protecting portfolios from inflation (and profiting from it) because they pay interest every 6 months based on a fixed rate set at the bond’s purchase. The interest payment amounts can vary since the rate is applied to the value of the bond. If the value is adjusted higher over time due to rising prices, then the interest rate will be multiplied by the increased value. As a result, investors receive higher interest payments as inflation rises. Conversely, investors will receive lower interest payments if deflation occurs.
Action Step: Answer This Quiz Question
True or False?
Medium term goals should have a 50/50 mix of stocks and bonds so that it grows, but isn’t volatile.
It’s fine to lump medium term goals into short or long term categories.
I’ll see you back here tomorrow for your next challenge: What should you invest in for long term goals?
Quiz Answers: 1. True, 2. False.
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