If you’re saving up for a short-term goal like a holiday or wedding the types of investments you need to consider are vastly different than for someone who’s saving for retirement.

Instinctively you’d think that investing for a short-term goal requires you to build your assets as quickly as possible. This would lend itself to a high equity weighting, perhaps through funds like CF Woodford Equity Income (GB00BLRZQ406) which lets investors
build up a potentially-sustainable and rising dividend stream.

The problem with equity-based investing is that it carries risk and that’s something you can’t afford if you have a short-term investment horizon.

If you try to use the stock market, you could find that your dream of an exotic holiday or grand wedding is scuppered if share prices don’t work in your favour. The volatility of the stock market means an investment in equities should be for a minimum of five to 10 years.

‘There have been two occasions in the past two decades when the FTSE 100 has fallen by over 40% peak to trough in capital terms, with the falls lasting two to three years. This highlights that over short periods the stock market cannot be relied upon, even though it is an excellent means of generating wealth over the longer term,’ says Rob Morgan, pensions and investment analyst at Charles Stanley.

Asset picks

Most experts say you should stick to very low-risk assets if you’re investing for less than five years. Claire Francis, savings and investments expert at Barclays Stockbrokers, suggests keeping part of your savings in cash. ‘In many cases there are often lots of things which need to be paid for along the way, rather than one lump sum, which means that investing would not be the most convenient option,’ she says.

Maike Currie, investment director for personal investing at Fidelity International, says you could still invest but lean towards assets that are less risky than equities.

‘If minimising risk and preserving your capital is your priority, a high weighting to equities may be slightly risky. It will be prudent to allocate more heavily to less risky assets such as bonds as part of a diversified portfolio,’ she says.

A good option could be a strategic bond fund, which has the flexibility to invest across all parts of the bond market to find areas with the best value. This will help protect you if interest rates rise, which usually causes the value of bonds to go down.

An example is Henderson UK Preference & Bond (GB0007535866) which offers investors an attractive yield of 4.9%. The fund is down 2.2% over one year but has a three-year cumulative return of 10.1%.

More information can be found on strategic bond funds in a feature on pages 50-53 in this week’s issue of Shares.

Short-term focus

A bond ETF like iShares £ Corporate Bonds 0-5 year (IS15) would be a lower-cost option. It has a 12-month yield of 2.9% which compares favourably to its annual charge of 0.2%. Its three-year annualised return is 3%. ‘Its focus on short-term - and therefore short duration - bonds helps to mitigate the danger that bond prices do fall in the event central banks start to raise interest rates,’ says Russ Mould, investment director at AJ Bell Youinvest.

Another way to get bond exposure is via Schroders MM Diversity Income (GB00B432ML56). This fund aims to beat UK inflation over time, while making an average 4% annual income payment over a five-year period. It has a 50% exposure to stocks, 15% to bonds, 10% to alternative assets and 25% to cash. The fund is down 4.2% over one year and has a three-year cumulative return of 8.4%.

‘The ongoing charge is relatively high [1.75%], owing to the fact this is a fund of funds, but the potential payback comes via the diversification and downside protection it is designed to offer alongside the income objective,’ adds Mould.

The ultimate goal for short-term investing should be wealth preservation - you should only invest what you can afford to lose.

If you still want high equity exposure you could consider RIT Capital Partners (RCP). This investment trust employs a multi-asset approach to investing and aims for equity-type returns with less volatility. It has returned 8.2% over the past year.

Separate pots

It’s a good idea to keep your holiday or wedding savings pot separate from your other investments. This will enable you to apply a different asset allocation strategy to each savings pot and ensure your investments are on track to meet your respective goals.

Mould says investing your pension for retirement is a much longer-term project, so it may be better suited to different asset allocations and strategies, depending on your financial needs, goals and personal circumstances.

‘In theory, someone saving for their retirement in 20 or 30 years’ time could afford to take more risk by buying stocks, as they have more time to recover from any market upset. They can also focus on harvesting and reinvesting company dividends to make the most of the power of compounding,’ he adds.