In today’s uncertain economic climate, many investors are looking to park their money in options that offer stability and minimize risk.
While the stock market tends to garner much attention, short-term investments present a compelling opportunity – especially for those with modest core capital and a low tolerance for risk.
The Importance of Safety in Short-Term Investments
When investing for the short term, typically for five years or less, safety becomes paramount. The limited investment window means there is less time for an investment to recover if its value suddenly drops.
As such, short-term investors need options that provide relative stability and protection of principal.
Short-term investment vehicles minimize risk in two key ways:
- They are liquid – The invested money can be withdrawn at short notice if required. This differs from assets like real estate which take time to sell.
- They have fixed returns – Investors earn a fixed rate of interest, unlike stocks where returns fluctuate. While upside potential is limited, so is the downside risk.
For short-term investors, the safety and accessibility of capital trumps returns. With that framework in mind, here are 8 of the best short-term investment options to consider:
Top Short-Term Investment Options
1. High-Yield Savings Accounts
High-yield savings accounts offer FDIC insurance and pay significantly higher interest than a traditional savings account. The national average APY for high-yield accounts currently sits at 0.87%, compared to just 0.06% for a standard savings account.
Good for: Risk-averse investors who want full liquidity and principal protection. The interest compounds daily, growing the balance over time.
Risks: Interest rates fluctuate so returns are variable. As inflation rises, the real returns diminish in value.
Where to get: Online banks like Marcus by Goldman Sachs offer high-yield savings with no monthly fees or balance requirements.
2. Short-Term Corporate Bond Funds
These mutual funds invest primarily in short-term rental investments, high-quality corporate bonds maturing in 1-5 years. The diversification across many bonds reduces risk versus buying individual bonds.
Good for: Investors who want moderately higher returns than savings accounts with minimal risk.
Risks: Corporate bonds carry higher risk than government bonds. Returns fluctuate with interest rate changes.
Where to get: Low-fee ETFs like Vanguard Short-Term Corporate Bond ETF (VCSH) provide broad exposure.
3. Money Market Accounts
Money market accounts function like savings accounts but generally pay higher interest in exchange for larger deposit requirements. Many have check-writing features.
Good for: Investors who want full liquidity and higher yields than savings accounts. Useful for short-term parking of cash.
Risks: Returns fluctuate with interest rates. Accounts are not FDIC-insured but low-risk.
Where to get: Banks and investment companies. Comparison shop for the highest rates without excessive fees.
4. Cash Management Accounts
Offered by brokerages, these accounts combine features of checking, savings, and money market accounts. They allow investing cash balances in liquid short-term vehicles.
Good for: Investors who hold cash at brokerages short-term before investing or withdrawing it. Convenient hub for all cash activities.
Risks: Returns fluctuate with interest rates. Accounts are not FDIC-insured, but the principal is protected if only used for cash holdings.
Where to get: Major brokerages like Fidelity, Schwab, and TD Ameritrade offer cash management accounts. Compare features and interest rates.
5. Short-Term Government Bond Funds
These funds invest primarily in short-term U.S. government bonds like Treasury bills and notes. Their low-risk nature makes them ideal cash equivalents.
Good for: Risk-averse investors who prioritize safety and want slightly higher yields than a savings account.
Risks: While government bonds are low-risk, funds can fluctuate in value with interest rate changes.
Where to get: Low-cost ETFs like Vanguard Short-Term Government Bond ETF (VGSH) offer broad exposure.
6. No-Penalty CDs
No-penalty CDs offer fixed interest rates like regular CDs, but allow penalty-free withdrawals of principal. This provides liquidity not found in traditional CDs.
Good for: Investors who want guaranteed returns for a set period (up to 1 year) but may need sudden access to the cash.
Risks: Low returns closer to savings accounts. Requires locking up funds for a period to get the highest rates.
Where to get: Online banks and credit unions offer competitive no-penalty CD rates.
Treasury bills, notes, and bonds are direct debt obligations backed by the full faith of the U.S. government, making them extremely safe. Maturities range from 1 month to 30 years.
Good for: Very conservative investors who want ultimate safety and don’t mind earning lower fixed returns in exchange.
Risks: Interest rate risk for longer-term Treasurys. No FDIC insurance but virtually no risk of default.
Where to get: Individual Treasurys can be bought directly from TreasuryDirect.gov or via a brokerage account.
8. Money Market Mutual Funds
Money market funds invest in highly liquid short-term vehicles like commercial paper, Treasurys, and certificates of deposit. Returns often exceed money market accounts.
Good for: Investors who want the safety of principal with modestly higher returns than a savings account.
Risks: Not FDIC insured, but the risk is very low given the safe underlying investments.
Where to get: From most mutual fund companies. Vanguard and Fidelity offer very low-cost options.
Tips for Investing Money You May Need in Five Years or Less
When investing on a short time horizon, it’s vital to:
- Set reasonable expectations – With safety as the priority, target modest returns similar to savings/money market accounts. Volatility and risk should be very low.
- Focus on principal preservation – Opt for stable, highly liquid vehicles that minimize the risk of loss of capital. Avoid stocks and long-term bonds.
- Understand the risks – While short-term investments are generally low-risk, evaluate each option’s unique risks. Monitor interest rate movements that impact returns.
- Pick the right investment for your specific needs – Consider factors like liquidity, risk tolerance, and return requirements. Your ideal investment may differ from someone else’s.
While short-term investing differs from long-term investing, attractive low-risk options are available. By choosing vehicles like high-yield savings accounts, short-term government and corporate bonds, treasury bills, and money market funds, investors can earn modest returns.
In doing this, they can also minimize their overall risk over a shortened timeframe. Maintaining easy access to your money and protecting your principal are keys to success when investing short-term.
Frequently Asked Questions
1. What makes a good short-term investment?
The ideal short-term investment offers safety of principal, liquidity, and modest but stable returns. Government-backed securities and cash equivalents fit the bill.
2. How does the economic climate affect short-term investments?
Rising interest rates can dampen short-term investment returns. High inflation also erodes real returns. A slowing economy increases recession risk and can reduce liquidity.
3. What are the risks involved in short-term investments?
The main risks are lower returns than long-term investing, inflation eating real returns, and interest rate fluctuations impacting yield. While default risk is very low, short-term investments are not completely risk-free.