How do I plan for a financial goal 5-10 years away?

We discuss how to plan for financial goals 5-10 years away. They are neither long-term to include equity nor short-term to avoid equity completely.

Financial goal planning is all about setting the right priorities. If my need is within five years, it would be prudent to avoid all equity. Equity returns are volatile regardless of investment duration. If I have, at best, five years to play with, then I may not have the time to allow markets to recover if I start with a string of bad returns. Or, if I am not careful, I could lose all earlier gains in a crash in the last year or two. So equity is best avoided.

Some people argue, “Then how do I beat inflation?”. Inflation is negative compounding. It needs time to work its dark magic. Typically, not much is going to happen in five years or less. So, one could easily combat inflation for short-term goals by choosing a safety-focused conservative portfolio and investing the appropriate sum.

For long-term goals – which we would like to define as ten years and beyond – a good chunk of equity is necessary, but not more than 50% to 60%, depending on the risk appreciation of the investor.

The situation with intermediate-term goals (greater than 5Y but less than 10Y) is tricky. Even expert investors are better off without any equity exposure for short-term goals. Even novice investors cannot say ‘no’ to equity for long term goals. For intermediate goals, however, the strategy would largely depend on the investor’s experience.