Saving over the short term

I am 28 years old, single and in full-time employment. I intend to buy a property in three years' time and fund this mainly by a home loan. By way of savings, I have cash of Lm4,000 with a local bank, plus a life assurance savings plan, to which I contribute Lm50 a month and matures when I am 55 years old. I am looking to maximise my savings potential over the next three years to build up as big a deposit for the property as possible. What should I do as an alternative to the cash deposits and should I surrender the Life Assurance policy and do something more aggressive?

The key here is the short-term nature of your savings needs, i.e. only three years. You currently have the bulk of your funds on deposit and that really is the best place for them.

If your investment timescale were 10 years, i.e. that you could safely lock them away in an investment scheme for that period, then you could start to take some risk with your capital.

Unfortunately, three years is far too short a timescale to be risking your capital as you have a clear need for this money, i.e. the purchase of the property. What would your reaction be if, rather than building up a nice deposit for the apartment, you actually lose money?

This may disappoint you, especially as investors are enjoying good returns on their capital in the many international markets. Investing however involves risk and any good financial adviser will reiterate that past performance should be no guide to the future.

If however you are prepared to take the gamble and, bearing in mind that it may be very difficult to recoup any potential losses over such a short period, then any stock market investing should have very clear and disciplined rules attached to it.

Firstly, I would not suggest investing directly into any individual shares as the risks are too great and you should instead follow the pooled or fund route.

Secondly, you must set parameters of when you will sell if making a loss and when to sell when a certain profit has been made. If you do not apply such a discipline, then it could be a recipe for disaster as you must stick to it.

For example, you should discipline yourself to sell if the price of the fund falls 5% at any point, or after you have made a 20% profit.

As regards the life policy, generally I would say to keep it since, while you may not 'need' the life cover now, you will need some form of life assurance once you purchase the property to cover the home loan should you die before the loan is repaid.

You are however making a high contribution into the one plan. You may wish to consider a second savings plan that invests more aggressively, especially if the policy matures in 27 years' time.

The mistake I often come across is for people to stick to very steady, cautious funds regardless of their investment timescale. In your case, your savings plan matures when you are 55 and you should be prepared to take some element of risk over such a long period.

Mark Hollingsworth is the director of Hollingsworth International Financial Services - licensed by the MFSA to provide investment services under the Investment Services Act 1994 (IS/32457). Address any financial questions to: Mark Hollingsworth, c/o The Sunday Times, PO Box 328, Valletta CMR 01. Alternatively, he can be contacted on 2131-6298/9984-2614 or e-mail mh@hollingsworth-int.com, www.hollingsworth.eu.com

Past performance is no guide to the future and, except where amounts are guaranteed, the price of your investments (and the currency in which it is denominated) may fall as well as rise. Your personal tax situation will depend on residence. Always consult a professional adviser. This article does not intend to give investment advice and its contents should not be construed as such. Readers are encouraged to seek professional advice on their personal financial situation.