Short-Term Investments: The Basics

Nov 13, 2023 11:46:08 AM

When it comes to investing, it’s a smart idea to consider both long-term and short-term investments. Long-term investments cover retirement accounts and stock market portfolios designed to earn steady returns over time. However, it’s also possible to make short-term investments—particularly when interest rates are high, as they are in 2023. From bonds to CDs to high-yield savings accounts and beyond, here’s the scoop on short-term investments.

Short-Term Investments: The Basics

An investment is usually considered short-term if your money will stay in that investment vehicle for under five years. The exact length of a short-term investment varies: it could be anywhere from one day, to six months, to multiple years. Another key feature of a short-term investment is that when the investment reaches maturity, it’s easily convertible to cash—so you’re not tying up your money in real estate or a collectible item, for example, which could take time to sell.

Why Choose Short-Term?

Short-term investments offer a number of benefits to investors. While returns tend to be smaller than with long-term commitments, many investors appreciate the ability to withdraw funds more regularly or to sell their investment asset quickly, if access to cash becomes necessary. Generally speaking, short-term investments tend to be less risky, although it’s still important to do your research and understand the fine print before making any investment.

Options for Short-Term Investing

  • Bonds: A short-term bond is a loan to a business or government entity. When you purchase a bond, you are given a fixed rate of return in exchange for keeping your money tied up for a certain period of time. Bonds in general, and US Treasury bonds in particular, are seen as one of the safest investment vehicles available.
  • CDs: Bank Certificates of Deposit, or CDs, are similar to bonds in that they offer a set rate or return over a specific period of time, with very little risk. Interest rates are almost always higher than what you’d find with a savings account, making CDs a good short-term investing option for funds you don’t need to access for a few months or years.
  • High-yield Savings: A high-yield savings account functions exactly like a normal savings account, while offering a higher-than-average interest rate. The benefit of a high-yield savings account for short-term investors is that you can access your cash anytime you need it. However, the trade-off is that interest rates tend to be higher if you choose a bond or CD.
  • Peer to Peer Lending: If ethical investment is an area of interest, check out peer to peer lending platforms like Kiva. Peer to peer lending connects investors to borrowers around the world, so that you money goes to support some of the people and projects who need it most. The timing and risks of peer to peer lending vary, so do your research first.
  • Mutual Funds: When investing in the stock market, it’s almost always recommended that you plan to hold your investment for over five years. Still, there are some short-term mutual funds composed of various bonds, which are designed as a short-term investment vehicle. Be sure to check the fund’s expense ratio and past yield, as you may find that a traditional bond or CD account offers less risk and higher expected returns.

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Tags: Investing