Short-term investing

Q

I’ll need a down payment for a new home in a few years. How can I grow my investments as quickly as possible for that? — B.D., Lafayette

A

We’ve got bad news for you: You can’t grow your portfolio both quickly and safely in just a few years.

The stock market is a terrific way to build wealth, generally outperforming other options such as bonds or real estate over the long run. In the short term, though, anything can happen, such as a stock market crash. You don’t want the down payment you’ve accumulated to suddenly plunge in value a few months before you need it. Money you’ll need within a few years (even five years, if you want to play it safer) should not be in stocks.

Short-term money should be kept in slowergrowing but safer places, such as certificates of deposit (CDs) or money market accounts, to protect your assets. You can find good short-term interest rates at our sister site, TheAscent.com.

Q

How can a business’s earnings per share increase when its earnings don’t?

— H.T., West Palm Beach, Florida

A

Here’s how: The share count has shrunk. Imagine Buzzy’s Broccoli Beer (ticker: BRRRP), with 100 million shares outstanding and $500 million in net income. Its earnings per share (EPS) are $5. If it buys back 10 million shares (leaving 90 million) and then earns $500 million again in the next period, its EPS has suddenly risen to $5.56. ($500 million divided by 90 million equals $5.56.)

Share buybacks can serve companies and shareholders well, as they boost the value of remaining shares — but they shouldn’t be executed when the stock is overvalued. Paying too much for the shares destroys value.