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Investing, to a large degree, is often considered a long-term effort. However, it’s also possible to use short-term investment strategies to meet a variety of goals. Depending on your situation and when you want access to the money, a variety of short-term investments can make sense. Here’s what you need to know about short-term investment strategies.
In this Guide:
What Is a Short-Term Investment?
There’s no single definition for a short-term investment. In general, it’s based on when you think you’ll need the money you’re using to make the investment. For many, short-term investment is something you’ll need to liquidate in five years or less. A general rule of thumb is to consider anything you need in the next three to five years as a short-term investment.
Very liquid investments are also considered short-term. For example, a money market account might be considered short-term because you might want to withdraw the money in four years to make a down payment on a house. The funds are liquid and don’t require a lot of effort to be withdrawn as usable cash.
Factors to Consider With Liquid Investments
Liquid investments are assets that can be quickly converted to usable cash. Savings products and stocks are often considered liquid because it doesn’t take much time and effort to turn them into cash that you can then use for a variety of purposes.
When deciding what liquid investments to use for your goals, there are a few factors to consider:
- Return: What type of return can you expect? It’s important to note that, for short-term investment strategies, you might not want to take on additional risk in order to see bigger returns. Stocks offer higher returns, but they also come with the potential for loss. Choosing something with a lower return, but a guarantee that you won’t lose your principal can make sense, depending on when you want the money.
- Principal guarantee: Is your principal protected? With certain FDIC-insured savings products, you know that you’ll at least get back what you put in, even if you aren’t seeing a large yield. For short-term investments, though, this might be more important than total return.
- Risk tolerance: Depending on your level of risk tolerance, some liquid investments might be better than others. Some investors like the idea of using bond funds or bond exchange-traded funds (ETFs) because they’re liquid and offer a higher return than savings products, but with less risk than stocks. Think about where you stand and what makes sense for you.
- When you need the money: If you know you’ll need the money in a year or less, liquid investments closely related to cash are often considered a better choice. On the other hand, if you won’t need the money for five years, some investors like the idea of dividend stocks or bonds, depending on risk tolerance.
The best short-term investments are based on what is likely to work for you. The foundation of which is your time frame, risk tolerance, and goals. Here are a few strategies that can help you move forward:
High-Yield Savings and Other Cash Management Products
If you have a low-risk tolerance and want access to the money as needed, high-yield savings accounts and cash management products can be good choices. Double-check to ensure that they are FDIC-insured in order to guarantee your principal.
Peer-to-peer lending platforms can make decent short-term investment strategies for those who hope to use the money in three to five years. You can see reasonable returns and the risk is considered somewhat moderate. As long as you’re careful about which notes you get, you can reduce your risk of losing principal.
Treasuries, Bonds and ETFs
Bonds can be a solid choice, especially if you don’t need the money for two to four years. Treasuries are generally considered very safe since they are backed by the U.S. government. Bond funds and bond ETFs can also be good choices. They include a number of different types of highly-rated bonds and the risk is considered low to moderate. Using a good robo advisor can help you add bond ETFs to your portfolio, and it’s easy to access the money later.
Certificates of Deposit (CDs)
It’s important to note that, as liquid investments go, CDs are generally a little less liquid. You end up paying a penalty if you cash them in before they mature. As a result, you could end up losing out. However, if you’re willing to lock in a rate for two to five years, you can often get a higher yield than you’d see with a high-yield savings account or cash management account. Plus, these are FDIC-insured, so you won’t lose your principal.
Some stocks are considered among the best short-term investments because you have the potential to see solid returns, even if you have to deal with some degree of elevated risk. For example, some investors like using dividend stocks as short-term investments because they offer a payout on top of appreciation. Additionally, investing in dividend aristocrats can provide you with relatively stable assets in your portfolio. Consider which stocks might be useful if you have a timeframe of three to five years and want to see a potential boost in returns. Just be aware that you could lose your principal, or that the market could drop just when you need to liquidate your assets.
Why Make Short-Term Investments?
The best short-term investments can help you reach your goals a little bit faster, or at least provide a higher return than you’d see if you didn’t do anything with your money. However, some short-term investment strategies aren’t for everyone. It’s important to carefully consider when you might need the money, as well as your risk tolerance, before moving forward.
With the right approach, you can benefit from short-term investments and get more out of your money without taking on more risk than you can handle.
Is the Stock Market a Good Short-Term Strategy?
Some investors like to use stock funds and stock ETFs as part of a short-term strategy, as well as investing in dividend stocks. However, these investors might have a higher risk tolerance or be okay with the potential of liquidating their assets when the market is down.
For those who have a lower risk tolerance, or who are more concerned with protecting their principal than seeing higher returns, the stock market often isn’t the best choice when it comes to short-term investments.
How to Manage Your Short-Term Investments
Make sure you understand when youll need access to the money, and know the risks involved in the assets you choose. Think about when you want to get the money and consider ahead of time what it might take to liquidate your assets.
If you have cash management accounts or high-yield savings, it won’t take a lot of effort to get your money, so you can usually just plan to access it as needed. On the other hand, if you’re using short-term government bond funds, you might need to plan ahead to liquidate your shares and transfer the money into your account.
The Right Investment Strategy for Each Time Frame
While there’s no one right way to manage your short-term investments, here are some general ideas for applying different short-term investment strategies.
|When you need the money||Potential investment choices||Potential rate of return||General risk level|
|One year or less||High-yield savings, cash management accounts, other cash products||Up to 1.10%||Low, especially for accounts with FDIC insurance|
|Two to three years||Bond funds and ETFs, some CDs, some dividend stocks||More than 1% in many cases||Depending on the product, low to moderate risk|
|Three to five years||Peer-to-peer lending, certain stock and bond funds or ETFs||More than 2% in many cases||Moderate to high risk, depending on the assets involved|
There are a number of short-term investment strategies you can use to help you reach various goals, and do so in a way that makes sense for your risk tolerance. The best short-term investments are those that are also liquid investments, which can help accomplish your financial objectives without being too risky for your situation.
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