For example, if you believe you may need your money within the next three years, investing in stock mutual funds is too risky because a prolonged period of declining prices, which occurs during a bear market, can cause an investor to end up with less principal than the original invested amount. Once you've decided that you want to invest your money into a vehicle that earns more interest in the short term than your regular savings account, but also offers stability, you have a few good options available.
High-yield savings: The typical interest rate on a savings account as of late is less than 1 percent. You can find rates that are significantly higher than 1 percent by setting up an account at an online bank. These institutions can use the money they're not spending on brick-and-mortar locations to pay their customers higher interest rates. You might also find a good high-yield savings account at your credit union. While you'll have easy access to your funds with the high-yield savings option, you'll still earn less than 2 percent.
Certificates of deposit CDs : You can find CDs in term lengths from three months up to five years, and you'll earn a higher interest rate the longer you're willing to lock up your funds. You'll receive a higher interest rate than high-yield savings and enjoy FDIC protection on your money, but you'll be charged a penalty if you need to take the money out before the CD matures.
Money market accounts: These accounts insured by the Federal Deposit Insurance Corporation FDIC let you protect your money while investing it and earning a bit more than the rate on a savings account. It's important to understand the difference between a money market deposit account and a money market mutual fund , though, because the mutual fund version isn't FDIC-insured.
With a money market account, you'll be able to write checks and may also have a debit card, but you'll likely be limited to a small number of transactions each month. The account pays slightly less than inflation, so consider this when deciding how long to keep your money parked there.
Additionally, money market deposit accounts usually have a minimum required deposit, so you may need to consider other options if your funds are more modest. Bond funds: The short-term investment that will pay you more money than all of the above options is a short-term bond fund. Short-term in this case refers to the maturity dates of bonds held inside the fund, and short-term issues are considered those bonds that mature from 1 year to 5 years.
A bond fund's manager buys bonds with staggered maturity dates and replaces them with new bonds as needed. You can keep your money invested in shares of the fund for a full three years or for as short a time as you'd like. Bond funds that invest in securities with short-term maturities often experience fewer negative effects from changing interest rates than funds that invest in bonds with longer-term maturity dates.
You can also diversify by purchasing shares in bond funds that hold a mix of corporate, government, and municipal bonds with varied maturities to protect your money during your short-term investment time frame. The trade-off is that bond fund returns are slightly less stable, and you won't have FDIC protection on your money.
While they offer a higher return potential, you will need to meet a minimum investment requirement. Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities. Full Bio Follow Linkedin. Certain deposit accounts, for example, can provide a set rate of return albeit a modest one, in most cases and allow you to withdraw money whenever you need to.
Market loss is a key factor when you consider liquidity, which is your ability to access the dollars you invest. Though deposit accounts offer stable returns, those returns in some cases may not outpace the inflation rate. A CD ladder is another option if you need your money soon but want to earn returns in the meantime.
Some banks, for example, may require you to forfeit some of your earned interest if you want to close your CD before its term is complete. Short-term investments are often associated with a stable income. So, when you know you need regular income, shifting more toward highly-rated bonds and other assets can help. Annuities have their own set of pros and cons, though.
For example, they can provide lifetime income, guaranteed growth for fixed-rate annuities , and tax deferment, but they typically have high fees, surrender charges, and can cause tax issues. Finding balance is an important part of putting together a portfolio that works for you. The Balance does not provide tax, investment, or financial services and advice.
The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.
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So the most important thing investors should be looking for in a short-term investment is safety. Short-term investments are those you make for less than three years. If you have a longer time horizon — at least three to five years and longer is better — you can look at investments such as stocks.
Stocks offer the potential for much higher return. Stocks fluctuate a lot, and the longer time horizon gives you the ability to ride out their ups and downs. So safety comes at a cost. Short-term investments do have a couple of advantages, however.
Also, they tend to be lower risk than long-term investments, so you may have limited downside or even none at all. A savings account at a bank or credit union is a good alternative to holding cash in a checking account, which typically pays very little interest on your deposit. The bank will pay interest in a savings account on a regular basis. Liquidity: Savings accounts are highly liquid, and you can add money to the account. Savings accounts typically only allow for up to six fee-free withdrawals or transfers per statement cycle, however.
The Federal Reserve has allowed banks to waive this requirement as part of its emergency interventions in the market. Corporate bonds are bonds issued by major corporations to fund their investments. They are typically considered safe and pay interest at regular intervals , perhaps quarterly or twice a year. Bond funds are collections of these corporate bonds, and these collections consist of bonds from many different companies, usually across many industries and company sizes.
The bond fund will pay interest on a regular basis. Risk: A short-term corporate bond fund is not insured by the government, so it can lose money. Liquidity: A short-term corporate bond fund is highly liquid, and it can be bought and sold on any day that the stock market is open.
Government bond funds purchase investments such as T-bills, T-bonds, T-notes and mortgage-backed securities from government-sponsored enterprises such as Fannie Mae and Freddie Mac. These bonds are considered low-risk.
In addition, a fund of short-term bonds means an investor takes on a low amount of interest rate risk. Liquidity: Government bonds are among the most widely traded assets on the exchanges, so government bond funds are highly liquid. And even worse, short selling is essentially prohibited in a retirement account. Although more sophisticated methods involving put options are available, they can get complicated in a hurry. For a long time, retirement investors had no easy solutions when they wanted to bet against a market.
Always invert Inverse ETFs opened the door to short positions in retirement accounts. By buying inverse ETFs, which themselves use swaps and futures contracts to get the exposure they want, you'd have an investment that went up when a target index went down and vice versa. Most people, though, didn't stop there. When you look at the relative sizes of ETFs, you'll see that leveraged inverse ETFs typically have far more in assets than their unleveraged cousins.
That risk-taking mentality makes sense for short-term traders. But the tracking-error problems that long-term leveraged ETF investors face are much reduced when you take the leverage out. Why use inverse ETFs? So when can inverse ETFs come in handy? Basically, any time you'd want to sell an index or sector short, an inverse ETF can give you similar exposure.
Here are some possible uses:. Inverse ETFs aren't perfect. They have higher fees than the rock-bottom expenses of most long-only index ETFs, and their use of derivatives can create tracking error even without leverage. But as a way to bet against markets that you can use anywhere, they're worth considering. But unleveraged inverse funds can actually serve a valuable purpose. If you ever need a bet against a particular market, take a closer look to see whether inverse ETFs might be the right way to play.
Meanwhile, some ETFs are poised to post big gains from prevailing trends in the economy. Investing Best Accounts. Stock Market Basics. Stock Market. Industries to Invest In. Getting Started. Planning for Retirement. Retired: What Now? Personal Finance. The Ascent. About Us.
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