9 Best Short-Term Investment Options in 2018

9 Best Short-Term Investment Options in 2018

Short-term investments are investments made with the expectation of a limited timeline — typically one to three years or less. They are also known as temporary investments. Unlike long-term investments, which can yield a greater return over time, short-term investments are typically lower-risk investments. Such investments have a predictable, smaller return and highly liquid assets, such as a high-yield savings account.

Why Short-Term Investment?

Because long-term investing in the financial markets offers greater returns, you might wonder why an investor would need short-term investments. Consider this scenario: Maybe you’re saving money for the down payment on a house you plan to buy in four years. If you put those funds in the stock market in hopes of making money, you could achieve higher returns, but you’ll also take on more risk.

9 Best Short-Term Investment Options

Several different short-term investment options exist, and each can serve a different purpose in your portfolio. Consider investing in a few different short-term investments to meet your various financial goals. Here are the nine best short-term investment options there are.

9 Best Short-Term Investment Options infographic

Savings Accounts

If you have money in a savings account at a bank or credit union, it’s likely covered for up to $250,000. That makes this type of account a very low-risk investment. Moreover, savings accounts and money market deposit accounts lets you withdraw all of your funds at any time without incurring a penalty. These types of accounts usually pay interest, but typically at a lower rate than some other short-term investment options, like certificates of deposit.

Brokerage Money Market Mutual Funds

Although bank and brokerage money market accounts might sound similar, they aren’t. A money market mutual fund is a low-risk mutual fund that holds investment-grade, short-term government bonds, and sometimes AAA-rated corporate debt that mature between 30 and 90 days.

Like a typical mutual fund, an MMF sponsor pools investors’ savings into a fund typically organized as a trust. However, MMF sponsors have restrictions in what kind of investments they can make.

Additionally, the assets and liabilities involved with these types of funds are different from other mutual funds. If you invest in an MMF, you can redeem your shares on demand. You can also get the price you paid for them, which you can’t do with other mutual funds. Some MMFs even allow investors to write checks on these accounts.

Although money market funds traditionally hold their value at a share price of $1, there’s no guarantee that the principal value won’t deviate from $1, which makes the MMF riskier than the comparable bank and brokerage account products.

Certificates of Deposit

A certificate of deposit is a time deposit account from banks and credit unions that works like a promissory note. In exchange for a competitive, fixed interest rate, you’re required to keep your money in the account for a specified amount of time.

CD term lengths range from a few months to five or more years. The interest rate depends on how much money you put in the CD and how long a term you choose. Generally, the more money you deposit and the longer the term you choose, the higher your interest rate will be.

However, if you withdraw money from the CD before its maturity date, the withdrawal is subject to a significant penalty fee. Basically, you’ll have a penalty of three to six months’ interest if you take the money out early.

Treasury Inflation-Protected Securities

Treasury Inflation-Protected Securities are marketable securities designed to protect investors from the negative effects of inflation. It also protects their principals adjust according to changes in the consumer price index. TIPS are issued with maturities of five, 10 and 30 years and pay interest twice a year. When inflation picks up, TIPS can shine. In addition, although you’ll have to pay the Feds, the interest you earn on TIPS is exempt from state and local income taxes.

You can invest in TIPS with a minimum of $100, and you can purchase additional TIPS in increments of $100. You only need to hold the TIPS for 45 days before you can cash out.

TIPS are low-risk investments because they are backed by the U.S. government. Also, it’s because their value rises with inflation but the interest rate remains fixed. However, TIPS usually carry lower interest rates than other corporate and government securities. Thus, they might not be a good choice if you’re an income investor.

Series I Savings Bonds

A Series I savings bond is an interest-bearing U.S. savings bond designed to protect against inflation. Most Series I bonds are issued electronically. But you can purchase paper certificates with a minimum of $50 using your income tax refund.

This investment has two return components and will earn interest for up to 30 years. The first component is a fixed interest rate set at issue. The second interest rate is based on the inflation rate and usually adjusts twice a year. Series I savings bond interest payments are free from state and local taxes and are completely tax-free in some cases.

An I bond can be a great investment for those without a lot of cash because the minimum investment starts at just $25. You’re required to hold an I bond for a minimum of one year. Thus, if you’re an ultra-short-term saver, this likely is not an option for you.

short term vs long term

Short-Term Bond Funds

A short-term bond fund is a mutual fund that invests in bonds with maturity terms of 1 to 3 ½ years. The types of bonds in the fund’s portfolio can vary. For example, that includes government, corporate, taxable and tax-exempt bonds.

Although tax-exempt bonds might have a lower interest rate than taxable bonds, if you’re in a high tax bracket, your after-tax rate of return might be higher. Fairly conservative investors favor short-term bond funds because they’re less sensitive to interest rates than portfolios with longer durations.

Although short-term bond funds can lose value if interest rates rise, they’re less risky than long-term bond funds. That’s because of the short duration of their underlying bonds.

Individual Short-Term Bonds

If you have more than $5,000 and don’t want to play the stock market, you might consider investing in individual short-term bonds. Generally, an individual bond must be purchased in increments of $1,000 or more. If you don’t have thousands of dollars to invest, you’ll be limiting your diversification. For example, even if you invest $10,000 in 10 different bonds, if one bond defaults, you’ll lose 10 percent of your investment.

Bonds vary in risk level and interest rate. They’re rated from AAA to D, with AAA designating the safest investments. However, as the bonds get riskier, the interest rate generally increases to compensate investors for the gamble.

Corporations and municipalities typically offer bonds and often refer to “munis.” Corporate bonds typically offer higher interest rates. The interest you earn on munis is generally exempt from federal income tax. However, you might have to pay state or local taxes or include capital appreciation on your federal tax return from purchasing discounted munis.

Peer-to-Peer Lending

Peer-to-peer lending involves making loans to other people — often complete strangers — through a website. Borrowers simply post loan listings on different peer-to-peer websites for investors to review.

The concept involves a number of individual investors funding a fraction — sometimes as little as $25. Peer-to-peer lending standards are significantly more lenient than banks’. These loans’ interest rates are usually lower than those offered by traditional lenders. But the rates will likely exceed those on high-yield savings accounts. Thus, you stand to make a much higher return with peer-to-peer lending.

Although peer-to-peer loan sites help evaluate risk for the lender, it’s important to keep in mind that these loans are not safe. Therefore, if the borrower defaults, you lose your investment. Also, once you invest in a note, it’s harder to sell than a bond if you need to raise cash quickly. Typically, these loans come with three- to five-year terms. Thus, if you’re looking for a very short-term investment, you should probably look elsewhere.

Exchange-Traded Funds

If you’re looking for an aggressive short-term investment, consider exchange-traded funds. These are index funds that track an index, such as a stock or a bond index.

One ETF advantage is that one fund can hold hundreds or thousands of stocks or bonds. Thus, you get a lot more diversification than if you were trying to buy individual stocks or bonds yourself. You can even pick specific sectors of the market in which to invest. Additionally,  professionals manage these funds so you don’t have to monitor the specifics of your investments.

ETFs aren’t guaranteed investments and they aren’t safe through insurance like savings accounts and CDs are. Therefore, if your ETF has a few bad few months or even a bad few years, you could lose money. If you do opt for this type of investment, check the daily trading volume to make sure your ETF is traded frequently.

See Also: Best Long Term Investments: 4 Powerful Tips to Scale Up Your Strategies

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