Model Portfolios for Short- and Intermediate-Term Goals

Investing for retirement hogs much of the discussion about how to build a portfolio, but most of us save for multiple goals in the years leading up to our retirements: home down payments, weddings, and remodeling projects, to name just a few.

Many of those goals are just a few years into the future, so investing for them should necessarily look a bit different from the portfolio you build for your retirement.

But saving for those short- and intermediate-term goals can be deceptively complicated. Risk-tolerant investors might assume that just because stocks have delivered returns that have bested other asset classes over long time periods, they’re reliable over the short-term, too. At the opposite, conservative extreme, some investors might believe that the best way to meet short- and intermediate-term goals is to stick exclusively with guaranteed products such as CDs or money market accounts. That’s a particular temptation if yields have gone up. But if the investor’s time horizon is longer than a couple of years, the bite of inflation means that guaranteed products will be a losing proposition.

How Morningstar’s Role in Portfolio Framework Can Help

Morningstar’s newly launched Role in Portfolio framework can help light the way when determining the right investments for various holding periods, from short-term, such as a home addition in two years, to those that are more intermediate-term, such as a big trip to celebrate your anticipated retirement in 2030, to very long-term spending goals. Additionally, the framework can also help determine how much of your portfolio to allocate to various investment types.

To help investors match their holdings to their anticipated spending needs, Morningstar’s framework separates funds into one of four holding periods: short (a holding period of one to two years), short/intermediate (two to six years), intermediate (six to 10 years), or long (more than 10 years). To categorize investments, Morningstar looks at the worst time period—from peak to trough to eventual recovery—as well as how frequently those losses have occurred. In other words, if you put your money into an investment, how likely are losses and how long would it take you to get back to breakeven after the investment has lost money?

Some stock types, such as U.S. large-growth and emerging-markets, have taken more than a decade to get back to their preceding peaks, and the likelihood of losses has also been high, especially over shorter time frames. Other investment types, such as high-quality short- and intermediate-term bonds, have required just a few years to recover from losses, and the losses have been infrequent.

About the Portfolios

The short-term portfolios featured here are geared toward investors with a time horizon to spending of two to six years. As such, they’re composed of cash as well as holdings that are considered short-term and short/intermediate-term in Morningstar’s Role in Portfolio framework. (Investors with very short time horizons—less than two years—should simply hold cash-type investments rather than bonds.)

For the intermediate-term portfolios, I assumed a time horizon to expenditure of between six and 10 years. Thus, the portfolios consist of cash as well as a combination of short-term, short/intermediate-term, and intermediate-term investments.

Because many investors save for short- and intermediate-term goals outside of their retirement accounts, I’ve created portfolios for both taxable and tax-deferred accounts. The portfolio holdings all earn Morningstar Medalist ratings from our analyst team.

How to Use Them

My key goal with these model portfolios is to depict sound asset-allocation and portfolio-management principles rather than to shoot out the lights with performance. For short- and intermediate-term goals, especially, many investors would rather be safe than sorry. Thus, capital preservation and inflation protection are key goals, but portfolio growth is less of a priority. Investors can use the portfolios to help size up their own portfolios’ asset allocations and suballocations. Alternatively, investors can use the portfolios as a source of ideas in building out their own portfolios.

Note that the short-term portfolios include a range of percentages. Investors with shorter time horizons—say, three years—should consider emphasizing cash and short-term bonds and can go without an intermediate-term allocation. But investors whose time horizons to spending are closer to six years might have heavier allocations to short- and intermediate-term bonds.

Short-Term Portfolio for Taxable Investors

Anticipated Time Horizon to Spending: 6 Years or Less

Risk Tolerance/Capacity: Low

• 20%-40%: Cash
• 40%-60%: Fidelity Limited Term Municipal Income FSTFX
• 0%-20%: Fidelity Intermediate Municipal Income FLTMX

Short-Term Portfolio for Tax-Deferred Investors

Anticipated Time Horizon to Spending: 6 Years or Less

Risk Tolerance/Capacity: Low

• 20%-40%: Cash
• 40%-60%: Fidelity Short-Term Bond FSHBX
• 0%-20%: Dodge & Cox Income DODIX

Intermediate-Term Portfolio for Taxable Investors

Anticipated Time Horizon to Spending: 6-10 Years

Risk Tolerance/Capacity: Low-Moderate

• 20% Cash
• 40% Fidelity Limited Term Municipal Income
• 40% Fidelity Intermediate Municipal Income

Intermediate-Term Portfolio for Tax-Deferred Investors

Anticipated Time Horizon to Spending: 6-10 Years

Risk Tolerance/Capacity: Low-Moderate

• 20% Cash
• 40% Fidelity Short-Term Bond
• 40% Dodge & Cox Income