The Best Short-Term Investments
The ultimate dream of every investor is to make returns as quickly as possible. The best short-term investments would reduce the risk of losing money and the inconvenience of having money tied down in long-term ventures.
Many people now believe that long-term investments are safer and they ultimately bring in better returns. They prefer patience and the waiting game.
The idea of buying up stock and then waiting for its value to multiply would not interest everyone. To many, keeping money away for a long time is a luxury they can’t afford.
Short-term investments are more flexible investment plans that give you access to your cash in short intervals. They provide an excellent option for investors who do not have the luxury of freeing up money for long periods.
While I am utterly confident that ventures with short timelines could be advantageous, it is essential to note that they could be less secure and more exposed to fraud and market fluctuations. Hence the need to read this article to learn what works and what doesn’t.
Another point you should note is, short-term investments are not ‘Make money quick schemes.’ They involve the same principles of any organized business and investment.
Let’s begin with understanding what short-term investments are and how they differ from long-term investments.
What is a Short-Term Investment?
Short-term investments, also called marketable securities or temporary investments, can easily be converted to cash within five years or less. They could be sold or withdrawn as cash in less than a year and still end up being profitable.
A few examples of short-term investments are Treasury bills, high-yield savings accounts, CD, government bonds, and money market accounts.
Two advantages short-term investments have over-investing in the long-term are
- You enjoy faster returns
- You have easier access to your money
It would serve you better if you required cash soon. For example, you want to buy a Tesla Model 3 in two years, why don’t you invest in the short-term so in two years, you would have made some extra cash and reach your goal of being the proud owner of an electric car.
If you are new to the investment world, it wouldn’t be a bad idea to start short-term. Since you might still feel uncomfortable parting with your money for a very long time. Short-term ventures can be a great way to start.
Now in the long-term approach, you pay stocks and other forms of securities, then you begin the long wait, with little regard to changing market conditions. This method comes with the assurance that the market would eventually come around for you. Stocks ultimately appreciate with time. This approach has a great advantage. In long-term investment, short-term fluctuations do not diminish your overall gains.
Now you see the differences between the long and the short term investment. You are in the best position to judge which suits you best. Let’s look at a few boxes you must tick before you begin investing in the first place.
Things to Look at Before Investing
- How much you are willing to invest – You need to be certain of the amount you are able to put into the investment. The money has to be available.
- Take a look at your debts – Are you servicing debt? Would you be able to finance your debt even as you are committed to an investment? You don’t want to be under the extra burden of paying a debt even as you are tied to investments.
- How long you would want the investment to run – How long can you set aside money without needing it?
- Also, you need to fully understand the process of converting your investment back into cash and you need to be comfortable with the process.
- Ask yourself, what returns are you expecting from the investment.
- How much risk are you prepared to take? Usually, the greater the risk, the greater the profit.
Determining the Best Short Term Investments
All investments come with a level of risk, not even short term investments are exempted from this.
An important law that I learned long ago is, with higher risk, comes greater expected returns. Equally, the more you risk, the higher the possibility of making losses. So as an investor you must be certain how much risk you are willing to take.
In determining the safest options you might reject investments offering higher returns because they come with a higher risk of loss. You should avoid every ‘too good to be true scheme’. You need to be certain that your investment is supported and protected by law.
You can reduce risk by spreading your investment across different investment options. You can also invest in a money account that is insured.
Below, I would share with you a few short-term investments that would yield you profit and reduce the risk of investing.
High-Yield Savings Accounts
A high-yield savings account typically pays 20 to 25 times the national average of the standard savings account of 0.1%. You could open a high-yield savings account in your present bank even though the highest interest rates are available from online banks.
When choosing high-yield savings options, consider interest rates, initial deposits requirements, and all possible account charges.
Certain banks would offer you annual percentage yields, which could be as high as 2.5%. These savings accounts do not offer incredibly high returns but you are assured of risk-free returns if it’s below the Federal Deposit Insurance Corporation limit (FDIC) of $250,000.
Certificates of Deposit
Certificates of deposit are deposits insured by the Federal Deposit Insurance Corporation (FDIC). Here your money is kept untouched for an agreed period usually up to 12 months. The interest rate increases with time.
You are given a window to withdraw your money at the end of the term. This window might be really short before your money is reinvested in another Certificate of Deposit. So you have to understand the timing and conditions as you could incur heavy fines if you withdraw your money prematurely.
Money Market Accounts (MMAs)
A Money Market account pays interests based on money market interest rates at the time. These typically are deposit accounts that pay higher than savings accounts. Also, they usually require higher deposits. In Money Market Accounts, there are limits to withdrawals and you may not be allowed to cash out at once.
Again these are Federal Deposit Insurance Corporation (FDIC) insured. Hence they are low-risk investments.
Short term bonds are bonds that mature in less than five years. They are issued by governments, companies and corporations. Low-cost index mutual funds are a great example of Short-Term Bonds with good returns. Even without being Federal Deposit Insurance Corporation (FDIC) insured, Short-Term Bonds are considered low risk.
When you are lending money to a company it’s called a short term corporate bond. Here, the company will pay an interest for the loan as returns on your investment. Bonds are liquid investments since they can be sold.
You could also invest in Short-term government Bonds. Here you are giving a loan to the government.
Government Bonds carry much less risk than corporate bonds since they are government-backed. They are not taxable, this makes short-term government bonds great if you are looking to avoid extra taxes. The interest is paid twice a year.
Like short-term corporate bonds, these are liquid so you can retrieve your money anytime you choose without fines.
Despite the low risk, you could still experience losses. A good example is the 0.78% fall in the Vanguard Short-Term Bond, in the second quarter of 2013. That same period saw a 4,02% and 6.07% fall in Vanguard’s Intermediate-Term Bond, and Long-Term Bond respectively. This shows a minimal fall compared to other segments. The lower risk in Short-Term Bonds is attributed to their shorter maturity. So, fluctuating interest rates do not impact greatly on the value of the fund.
Treasury Bills offer the safest investment instrument in the short-term investment category, with negligible risk. Treasury bills are issued by the government through the central bank.
They are not interest yielding but the government issues them at a discount and repays at the full price when they mature. Hence your profit lies in the difference between the issued price and the redemption value.
One downside of treasury bills is, they are among the lowest-paying short-term investments.
Online High-Yield Savings Accounts
The popular savings accounts given by typical banks pay little or no interest. Interest rates have continued to decrease over time. But with an online high-yield savings account, you are offered a variable interest rate which is much more than your traditional bank. These interest rates are over 15 times higher than the national average for savings accounts.
CIT Bank, SFGI Direct and American Express National Bank are some of the best online banks. They offer great interest rates, but rates change over time as they are not fixed.
These accounts come with the following advantages:
- Access to your funds – You can make continuous withdrawals. Usually up to money six times per month.
- Federal Deposit Insurance Corporation (FDIC) insured – Investments less than $250,000 are insured by the government.
- Unlimited deposits – You can increase your savings whenever you want.
An automated investment manager or a Robo advisor is a software tool that creates and carries out investment schemes using algorithms and mathematical formulas. An investment plan is set up for you using precise mathematics. With Robo advisors, investing becomes really simple.
Information like your financial goals, age, and the amount of risk you are willing to make are requested. The algorithm then develops a range of investments best suited for you.
In addition to being easy to use, Robo Advisors are cheaper than hiring an investment manager. You must ask yourself if you’re prepared to trust the robots? This method depends on pure logic and cuts away the human emotions.
Due to the accuracy of the machine, Robo advisors offer relatively low-risk investments. They are a good option for new investors because of their affordability and ease. Also, they offer great interest rates.
Exchange Traded Funds (ETFs)
An ETF or an Exchange Traded Fund is traded on an exchange just like stocks. Its price rises and falls throughout the trading day as trading occurs in the market. They differ from mutual funds, which are not traded on an exchange, and traded only once per day after the close of market.
ETFs offer a great choice for short term investing because they are bought and sold easily given you access to your money whenever you want.
One drawback is the minimum investment to make is much higher than other short-term investment plans.
Peer to Peer Loans
Peer to peer lending connects borrowers to lenders directly, cutting out the financial institutions who would normally act as the middleman. Lending on the peer to peer platform can be very favorable to short-term investors.
Peer to peer lending is great for short-term investment because the loan duration is usually under five years and you can loan out really small amounts, as little as $25.
With this platform, you could easily spread out your investment into multiple loans. You also get the option of receiving monthly payments. One really cool advantage is the interest rates are between 5% to 7%.
The disadvantages are, it would be hard to retrieve your money early. Secondly, there is the risk factor because the loans are not Federal Deposit Insurance Corporation (FDIC) insured.
By investing your funds, you increase their possibility of growth. Money can yield returns from investments done within limited time frames. Your situation is unique. Learn what works best for you. Be smart and learn to diversify. Take time to study, understand the terms and conditions of any investment platform before choosing.
Also, learn to follow up after investing. Keep track of your money and its growth.