Short-term investment goals are generally those that you’d like to reach within five years. That’s sooner than you think.

While you may feel tempted to put your money in a savings account for these goals, even the best money market accounts are only returning around 1% in annual percentage yields.

A wiser option may be to invest your money to boost your personal savings, rather than letting it sit idly by.

You may consider it a new burden to worry about investment risk. The key difference between a 25-year and five-year savings plan, after all, is downside risk. That’s where Betterment can help.

Since you have less time to overcome market volatility, our automated investment technology can invest your money in a safer, less risky portfolio to help ensure you reach your investment goal in time.

You can set up a customized, goal-based investment strategy to manage risk for all of your goals—including those that are likely to finish within five years.

When you set up a goal-based account with Betterment, we’ll build a personalized investment plan and portfolio for your goal. When your portfolio is properly risk-adjusted, you’re set up to achieve optimal returns, to meet that goal as quickly as possible.

Investing for the Short Term

A good investing strategy for the short-term is to invest in more assets that have less risk, include bonds or less volatile equities.

It’s important to invest smartly so you can have at least the goal amount in your account by the date you need it (for e.g., to pay for your college tuition).

Conversely, taking on more risk means you may be able to achieve your goal sooner than your target date.

This is why we ask about your deadline or time horizon when you create a new goal—it helps us advise your allocation up until your goal’s due date. Consider three different scenarios below.

Three Goal-based Scenarios

#1: From $0 to $50,000 in Five Years.

Let’s say you’re saving for a personal goal like a down payment on a house or adopting a child.

You’d like to save $50,000 over the next five years—and you definitely need it around a precise date. When you get started with your five-year goal, we advise an allocation of 50 percent bonds. As you move closer to your goal, our advice for your allocation will become increasingly conservative.

The following chart shows our allocation advice for a goal starting at 25 years out from the goal’s target date. For goals that are five years or less, our advice gets dramatically more conservative as the end-date draws closer.

#2: A Lump Sum for a Few Years.

You may have $100,000 and want to invest it wisely over the next five years. But you’re not comfortable with a lot of volatility impacting your principal balance, yet you want to do more than put cash into a savings account, money market or a CD. Believe it or not, there is such a concept as having too much cash. Instead, put the “idle” cash you have to work for you by investing it and having it earn returns.

If you don’t have a firm deadline and you simply want a place to grow your savings, you can take a little more risk to increase the chances for higher returns.

For a goal like this we recommend a steady allocation of between 60 to 70 percent bonds. While there is a chance that a drawdown results in short-term losses (which is a part of long-term gains), there is a much better chance that you will earn higher returns on this lump sum than you would in a regular cash savings account.

#3: A Former Long-term Goal Is Now Only a Few Years Away.

What seemed like a faraway goal is now only a few years away (for e.g., eldercare for your parents or college tuition for your children). As in the first example, managing risk in this scenario is about preserving your hard-earned savings.

This means that if you only have two years until your daughter heads off to college , you could consider shifting your allocation more into bonds to manage your risk.

With only a couple of years left, Betterment’s recommended allocation to bonds will be dramatically higher toward bonds than if you were 20 years out from reaching your goal. As the chart above shows, there is a steep drop-off in stock allocations as your goal’s due date approaches.

All of these scenarios above have a timeline of under five years in the market, but as you can see, each one requires a slightly different investing strategy because of the nature of the goals and target dates. Our portfolio improvements are designed to help you get better expected returns and manage risk more effectively in every one of these scenarios.

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