#investing #certificatesofdeposit #I-bonds #HYSA
Short-term investments are primarily for investors who are seeking to preserve their principal and have some additional income.
The stock market is therefore not suitable for investors with short-term goals, but is ideal for investors with pension portfolios and other long-term plans. As for shorter-term investors, their priority is preservation of principal rather than total growth.
Short-term investments vary, but they can be selected on the basis of certain common characteristics: interest rate risk is generally lower, as is certain long-term yield, and market risk is kept to a minimum.
Such instruments would therefore suit investors with a time horizon of 1-3 years, which could be a college education, or a down payment on a property purchase or any other large purchase.
Here are some of the most profitable types of short-term investments:
- Exchange-traded funds
- Ladder of treasury bills
- Certificates of deposit
- High yield savings accounts
- I bonds
Exchange-traded funds (ETFs)
Exchange-traded funds are suitable for both long-term investments and short-term investments.
The way in which ETFs are organized gives them a high level of liquidity.
An ETF buys assets that are highly profitable, usually securities, and creates an investment portfolio. The fund then sells its shares, the value of which depends on the average price of the fund’s assets. This way, the fund’s market makers are constantly buying or selling the shares.
The yield of ETFs was as high as 20-30% and there were maximum yields of 45-65% and more, but this is a volatile value and depends on the markets.
Ladder of treasury bills
Treasury bills are short-term bonds with a maturity of up to 1 year. Treasury bills are issued by the United States federal government and have little or no risk of default and little sensitivity to rising interest rates.
The ladder is bills with different maturities, analysts recommend Treasury bills with maturities of 4, 8 and 13 weeks the most, which will allow you to plan your investments more reliably. Suppose you have $15,000 to invest, you can put equal portions into 13-week, 52-week and three-year treasury bills. The guaranteed profits from these three streams can be reinvested or your short-term goals can be closed.
Certificates of deposit
You can earn higher returns if you invest in certificates of deposit or CDs. In this case, the investor must accept the conditions: the principal investment can only be withdrawn at maturity and the investor will receive the full interest on the investment.
CDs have higher interest rates and are therefore gaining popularity again. The interest rate on an annual certificate can be as high as 4.6%. The longer the commitment period, the higher the interest rates for the investor.
This is a risk-free method for the principal amount, but will not suit investors who require deposit flexibility, as they will have to pay a penalty, which varies from institution to institution, if redeemed early. CDs are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per account.
High Yield Savings Accounts
High Yield Savings Accounts, or HYSAs, have many advantages, the main one being the security that comes with FDIC insurance of up to $250,000 per account.
The second advantage is higher interest rates, which have risen recently. In general, banks pay investors rates up to 4% per annum.
The third advantage of HYSA is the flexibility in withdrawing funds as well as no minimum balance requirements and zero monthly fees at some banks.
I-bonds
These are special savings bonds where the owner receives an interest rate that varies according to inflation. The interest is set every 6 months.
Such bonds are more relevant than ever nowadays as inflation is only rising. The latest current rate from 1 November 2022 to 30 April 2023 pays 6.89%.
These are virtually risk-free bonds as they are issued by the federal government.
However, there are nuances that the investor should be aware of in advance:
- 12 months is the period when the bonds cannot be redeemed.
- The investor will lose payments for the last three months if the bonds are cashed in before the 5-year term expires.
- If inflation goes down, the interest rate will also go down.
- The maximum purchase amount is $10,000 a year electronically and $5,000 extra.
Bottom Line
Short-term investments are not as profitable as long-term investments, because the longer the investment, the bigger the profit.
There are fewer options for short-term investments and they can be both high- and low-risk, but in general, short-term investments are less risky than long-term investments.
The main advantage of short-term investments is the ability to make and withdraw profits relatively quickly.
If you looking for trading platform to choose, which is the best online broker to start with, check below our guide.
Latest News