When do we talk about a medium-term investment?
A medium-term investment is generally understood to mean an investment period of between 4 and 6 years. This distinguishes it from short-term investing (up to 3 years) and long-term investing (more than 6 years).
Typical goals for a medium-term investment include, for example, a planned property purchase in the future or, more generally, sensibly “parking” money that should not sit unremunerated in a current account and is not intended to be used for building long-term wealth.
Which types of investment are suitable for a medium-term investment?
Suitable for a medium-term investment are those types of investment that offer the balance of security and return potential that is right for you. Depending on your personal risk profile, the following may be worth considering, for example:
- Overnight deposits
- Fixed-term deposits
- Money-market ETFs
- Bond ETFs
- Equity ETFs
* Banks receive the deposit rate of the European Central Bank (ECB) when they deposit money with the central bank until the next business day. Overnight and fixed-term deposits for private customers are often subject to larger discounts on the ECB key interest rate by banks.
Option 1: high security, less return
If you want to invest your money as safely as possible and entirely without potential price fluctuations, overnight or fixed-term deposits, which in themselves are more suited to short-term investing, are the only option. Whereas with overnight deposits you have access to your money at any time, with a fixed-term deposit account it is tied up until the end of the term.
With these two types of investment, however, you have to reckon with the fact that in most cases the interest will barely be enough to offset the loss of purchasing power caused by inflation. In return, in the event of the bank becoming insolvent, your assets are protected up to the statutory deposit guarantee of €100,000.
An exchange-traded investment option with high liquidity is money-market ETFs. These invest in very short-term interest-bearing financial instruments or bonds. They are considered relatively safe and liquid. The price risk is extremely low, as the securities barely fluctuate owing to their short maturities. With money-market ETFs, however, the return is generally tied fairly closely to the ECB key interest rate – so the return potential is higher than with overnight deposits, for example.
Option 2: more return, low risk
Higher interest than overnight or fixed-term deposits is usually available to you with bond ETFs. These bundle together a large number of fixed-income securities, such as government or corporate bonds with different maturities. The prices of bond ETFs generally fluctuate less strongly than those of equity ETFs, but they react to changes in the general level of interest rates. When market interest rates rise, bond prices fall – when interest rates fall, prices rise. Overall, bond ETFs are well suited to stabilising a portfolio. If bond ETFs are used (significantly) predominantly, this is referred to as a more defensive strategy.
Option 3: high return potential, more risk
You have the highest return potential with equity ETFs. In return, with equities larger price fluctuations are possible than with money-market or bond ETFs, for example (losses in the higher double-digit percentage range can certainly occur temporarily). For this reason, it is particularly important to invest in a broadly diversified way, which means: in a large number of very different companies across various sectors, countries and sizes. This noticeably reduces the risks.
Equity ETFs are well suited as a counterpart to the security-focused part of a medium-term investment, in order to benefit from the higher return potential. As the sole type of investment for a medium-term investment, equity ETFs should only be considered if you are prepared to take on a higher risk in exchange for the high return potential, and if, given your financial circumstances and investment goals, you can also cope well with sharper price declines in your portfolio.
Why ETFs instead of individual equities or bonds? With ETFs (Exchange Traded Funds) you can invest in a large number of different companies at the same time instead of in individual companies, i.e. equities or bonds. Such broad diversification enormously reduces the risk of price fluctuations.
Since ETFs also count as what is known as segregated fund assets, in the event of the insolvency of the fund company, your bank or your online broker, your money is fully protected: Insolvency Your units in the ETFs remain your property.
The important factor of time
The more time you have available for your investment, the more likely it is that investments with high return potential, such as equity ETFs, will in principle come into consideration too. For a medium-term investment, this means, for example, that over the course of 6 years there are better chances of offsetting the sometimes strong price fluctuations on the equity markets than with an investment that ends after four years. So the shorter the investment period, the more difficult it is to make up any temporary losses and to achieve an attractive return in the end. For many investors, the equity allocation is therefore likely to be lower with a four-year investment horizon than with a six-year one. However, there are also always financial circumstances and investment goals that justify a relatively high equity component even for shorter investment periods.
Anyone who cannot tolerate any market fluctuations at all can use the fixed-term deposit ladder principle with fixed-term deposits. Here you place your money in several fixed-term deposit accounts, each with a different term. The longer the term, the higher the interest is as a rule. In this way, a fixed-term deposit becomes due again and again, which you can either use or reinvest (for a longer term).
Whatever the investment period: an ETF portfolio tailored to your personal risk profile provides you with the mix of return potential and security that is right for you. At quirion, you don't have to concern yourself with selecting individual ETFs: we take care of that for you – affordably, transparently and precisely tailored to your financial goals.
What you should think about before investing
As a decision-making aid to work out which medium-term investment option suits you best, you can ask yourself the following questions:
- How much risk can you really bear?
- Do you need the money at a fixed point in time?
- How much do you want your assets to grow within your investment period?
Please note: Even if, with a medium-term investment, your aim is to preserve the value of your money and not to maximise profits, you lose wealth in real terms if the return on your investment is lower than inflation.
Investing money for the medium term with quirion
If you want to make use of additional return potential for your medium-term investment, an ETF savings plan from quirion can support you in reaching your financial goals: broadly diversified, cost-effective and scientifically grounded, at quirion you invest in an ETF portfolio that is precisely tailored to your personal risk profile.
