Best Short-Term Investments
If you’re not exactly angling to play the stock market long term but still want to invest that extra cash you have, what are your options?
Lucky for you, there are plenty of good short-term investment options that can earn you decent returns. What are some of the best short term investments in 2018?
Still, first things first – what is a short-term investment, and how is it different from a regular or long-term investment?
What Is a Short-Term Investment?
A short-term investment, sometimes called a temporary investment or marketable security, is an investment that will yield its returns typically in less than five years (or in some cases within a year). Because of their time frame, short term investments are often safer than long term investments, especially on the stock market.
1. Certificates of Deposit (CDs)
Certificates of Deposit (or CDs) are a great investment option for a short-term strategy.
Offered by banks, CDs are deposits that banks pay a higher interest rate for because they are locked in for a longer period of time. CDs typically allow depositors to invest their cash in investments between three and five years, although some are even less (starting at one month) or can go up to 10 years. If you’ve got limited time, three years is a solid option, but remember – the longer the investment, the higher the yield, so you may want to opt for a five-year option. And while you may be able to receive monthly interest payments if you like, many investors choose to wait until their CDs have matured and cash in on the amassed interest at the end. And, as a plus, the FDIC will back your deposit up to $250,000 per person.
However, as a disclaimer, most CDs will penalize you for withdrawing your funds before maturity (usually in an amount equal to about three months of interest or so, but the fee varies depending on the bank), so you should really let your CD be until it matures if you want the full benefits of the investment.
The average returns for CDs range from around 0.5% to over 3%.
2. Treasury Securities
As a refresher, treasury securities are bonds issued by the U.S. Treasury and backed by the government’s credit – and the range of treasury products is pretty extensive.
While you can invest in a variety of treasuries including treasury notes, treasury bills, floating rate notes (FRNs) and more, a popular option for short term investments are treasury inflation-protected securities (TIPS).
TIPS are marketable securities indexed to inflation whose underlying value is based off of the consumer price index (CPI). So, the underlying value rises with inflation. However, once the TIPS matures, you will get either the adjusted amount or the original investment – whichever is larger, so deflation won’t hurt your investment.
Typically, TIPS have a return of between 0.5% and 2.5% (if you hold on to it for five years) semiannually. The idea behind the TIPS is that your end investment will be worth the amount of your original investment plus the interest you’ve accrued. And, your investment is protected from changes in inflation.
While you can invest in TIPS directly through the government (at TreasuryDirect.gov), most investors opt to invest in TIPS exchange-traded funds (ETFs) or mutual funds to avoid the interest being taxed – although you will need to open a brokerage account.
Additionally, treasury securities like bonds come at pretty much no risk, and their rates can range from 1.9% to 2.4%.
3. Rewards Checking Accounts
If it was 2008, you’d be getting pretty great APYs on rewards checking accounts (even upwards of 10% for some banks). But even though they’ve declined a bit in popularity in recent years, rewards checking accounts are still a good way to earn a bit in a short-term capacity.
To make the most of your rewards checking account, you will need to use your cash-back credit card to reap the full benefits (so using your debit card 10 to 15 times a month might make you miss out on your rewards).
4. Bond Funds
If you’ve got a shorter timeline (around two years or so), bond funds could be a great option.
Managed by professional financial advisers, bond funds are often a higher yield (although sometimes more risky) investment than money markets. So, if you’re looking for a high-yield short term investment, bonds may just be the right fit.
With bond funds, you can get the benefits of portfolio managers and yields that range upward of over 3%. Still, make sure to pick a bond fund with low fees.
As of 2018, some of the better funds include Vanguard (VFSTX – Get Report) , which has a fund with a minimum of $3,000, an expense ratio of about 0.20% and a current yield of about 3.12%. Additionally, iShares Barclays treasury bond fund (SHY – Get Report) for one to three years has a current yield of around 2.5%.
Unfortunately due to the nature of the market, your investment is not guaranteed. Still, there are no penalties for withdrawing your money early (which could be a huge plus for some investors).
5. Municipal Bonds
Municipal bonds are a bit riskier than TIPS or other kinds of bonds, but there’s pretty high yield potential.
Municipal bonds are issued by local, state or government agencies (not the federal government.) As a plus, municipal bonds are often exempt from interest tax.
There is potential to get a pretty high return (upward of 4%) on municipal bonds, but the major downside is that if the interest rates rise, the value of the municipal bond goes down – sometimes called the “interest rate risk.”
Still, if you hold on to your bond until its maturity, you can get your whole investment plus the interest back.