Part of: Investment Time Horizon
Typical Characteristics of Short-Term Investments: Low Risk, High Liquidity, Low Return
Risk is mitigated over longer periods of time. With short-term investments, we don’t have that kind of time. Therefore preservation of capital in short term investments is paramount. As individuals near retirement (or any other financial goal), they tend to revert to lower risk investments in an effort to prevent the loss of investment value.
Liquidity is the ability to quickly convert assets into cash while simultaneously preserving value. This is the also the primary goal of short term investments. While short-term could be classified as anything from tomorrow out to a few years, the idea is the same. When you require the funds, they will be readily available without sacrificing their value.
Low risk, high liquidity investments tend to have lower returns. A lower return is the price you pay for such benefits. For low return investments, inflation is the primary concern. On average inflation is somewhere around 3% a year, though it can be significantly lower or higher. Some short term investments have returns lower than inflation, subsequently reducing the spending power of assets over time.