As the name suggests, short-term investments can be held for a relatively short period. Typically, this will be anywhere from one month to five years. They can be held in a savings or brokerage account, and they include various financial instruments. This article will tackle the most common types of short-term investments and their advantages and disadvantages. It will also discuss determining whether a particular investment is suitable for you.
1. High-yield savings accounts
This is a great place to park your money for short-term needs, such as paying a big credit card bill or buying a car. You’ll get better interest rates than traditional savings accounts and may be able to access your money more quickly if needed. But high-yield savings accounts can also have drawbacks: They might not offer the same level of protection from creditors as checking and savings accounts, for instance. And unfortunately, there isn’t a set definition for what constitutes “high yield” when it comes to savings accounts.
2. CD ladders and money market accounts
A CD ladder is a series of certificates of deposit (CDs) that you purchase at different times and with varying maturity dates. The idea is to stagger the maturity dates so that some money is available at all times without locking up all your cash in one place.
This is an excellent short-term investment for people who want to earn more interest than they would from a standard savings account but don’t have enough money to invest in a long-term CD, which typically carries higher rates. You can create a CD ladder with a series of six-month CDs (or any number of months that works for you) or even longer maturity dates if you prefer.
3. Short-term bond funds
Short-term bond funds are a good option if you’re looking for a safe place to park your money that doesn’t require constant monitoring. In fact, bonds predict a yield of 4%, as it’s currently at 3.8% today. These funds invest in bonds with shorter maturities than typical bond funds, which means they have less risk but will also yield lower returns than their longer-term counterparts. The average maturity of the bonds held by these funds is about one year.
They are ideal for investors who want to ensure they’re getting a reasonable return on their money without being tied down by the volatility that can come with investing in stocks. Short-term bond funds are also good options for investors who want to use bonds as part of their portfolio diversification strategy but don’t have enough capital to invest in individual bonds through mutual funds or ETFs.
4. Fixed income funds
This is often used to mitigate risk in a portfolio and can be an excellent complement to equity-based funds. These funds are also helpful for investors who want exposure to bonds but don’t have the time or expertise to choose individual investment vehicles.
Fixed-income funds are invested primarily in bonds or other fixed-income securities. Most of these funds focus on government or corporate bonds, although some also include municipal bonds. In general, the longer the maturity date for a bond, the higher its interest rate will be.
5. Currency trading
Currency trading is a type of speculation involving buying and selling currencies. You can do currency trading through an online broker or a forex dealer, but it’s important to note that most brokers offer currency trading as part of a broader suite of investment offerings than just currency pairs.
This type of trading is generally done in the hopes of making a profit from the fluctuations in exchange rates. For example, suppose you anticipate that the euro will increase in value relative to other currencies. In that case, you might buy euros and then sell those euros later for a higher price than what you paid initially. An experienced forex trader can help you learn how to trade currencies, but it’s important to note that currency trading is a high-risk activity.
While some currencies experience only mild fluctuations in value relative to others, other currencies may experience extreme changes in exchange rates. For example, during the financial crisis of 2008-2009, the British pound dropped significantly against the US dollar due to economic problems within the UK economy.
To summarize this article, there are many ways to invest money in the short term, but they all have their own risks and rewards. Before making any decisions, you should consider your investment objectives and how much time you have before you need access to your funds.