What I Look For In Short-Term Investments

The typical short-term investment is expected to grow for several months to a few years and can be turned into cash or other short-term investments once they reach maturity.

I look at short-term investments as a way to protect cash that I may want to use productively at some time in the future. I don’t want to lose money, so I’m not willing to take large gambles with it.

A quality short-term investment must have:

  1. Stability – Small historical risk of losing money over any short time period. Stocks don’t work here for me.
  2. Liquidity – I want to be able to easily and quickly access the investment and turn it into cash. Real estate is an example of an investment that is not liquid.
  3. Low transaction costs – The cost of getting into or out of the investment should be very low to 0.

(In the investing world, “long term” investments are really long term — often decades — which leaves room for short-term investments that can still last several years. Here’s a look at some of the best long-term investments you can consider.)

There are various short-term investment accounts available to you, and which is right for you depends on your particular situation and preferences.

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Series I Savings Bonds

If you want to fend off inflation as well as earn an interest rate, check out Series I Savings bonds, government bonds whose yield can’t go below zero. They have a leg up on TIPS, which can actually post negative yields, says Stein.

For I Bonds, “there’s a composite rate of about 1.6% for the next six months, which is better than you’d see with many high-yield savings accounts,” Stein says. “Unfortunately, you can only invest $10,000 a year per Social Security number, although you might be able to get around it by instructing your tax return to be used to purchase I-Bonds in addition to making a separate purchase.”

An important caveat, though: I Bonds earn interest for up to 30 years. You must hold them for at least a year before you can liquidate them with the government, and if you cash them out before you’ve held them for at least five years, you forfeit three months of interest, similar to many CDs.

Short-term investments: Safe but lower yield

The safety of short-term investments comes at a cost. You likely won’t be able to earn as much in a short-term investment as you would in a long-term investment. If you invest for the short term, you’ll be limited to certain types of investments and shouldn’t buy riskier assets such as stocks and stock funds. (But if you can invest for the long term, here’s how to buy stocks.)

Short-term investments do have a couple of advantages, however. They’re often highly liquid, so you can get your money whenever you need it. Also, they tend to be lower risk than long-term investments, so you may have limited downside or even none at all.

Peer-to-Peer (P2P) Lending

While P2P lending isn’t necessarily a solution for short-term savings (and hasn’t been around long enough to be labeled as conservative!), it could prove to be an alternative to traditional stocks and bonds for some. P2P lending is exactly what it sounds like—you lend your money to consumers or businesses for an agreed-upon interest rate. Leading players in this industry, such as Lending Club and Prosper, help facilitate the loan and screen borrowers, so you can make an informed decision. Lending money to a pool of higher quality borrowers—as measured by credit score, credit history and other metrics—can result in a lower interest rate. Lending money to lower quality borrowers, who have a higher chance of defaulting on the loan, can deliver a higher rate. Many of these P2P lending sites are publishing rates of return between 5% and 30%, prior to their fee. (Lending Club charges investors a 1% service fee on each payment; Prosper collects an annual loan servicing fee of 1% of the outstanding principal balance.)

Before making an investment decision, be sure you are aware of all the risks involved and consider consulting with a financial professional for additional advice and support. With access to information, technology at our fingertips and great options for short-term savings, there’s no reason you can’t maximize your savings potential and have a healthy reserve in place.

Taylor Schulte, CFP® is founder and CEO of Define Financial, a San Diego-based fee-only firm. He is passionate about helping clients accumulate wealth and plan for retirement.

How do you double up £10,000?

The best way to double £10,000 is by investing for the long-term, rather than trying to get rich quickly.

Consider what returns you are looking to make and over what time period. But be realistic – you are unlikely to double £10,000 in a few years.

As tempting as it may be when you see some of the promised rates of returns on high-risk products or the rise of bitcoin, these are best avoided. That is, unless you absolutely know the risks and are happy to take them on.

3. The Safe Way

Just as the fast lane and the slow lane on the highway will eventually get you to the same place, there are quick and slow ways to double your money. If you prefer to play it safe, bonds can be a less hair-raising journey to the same destination.

Consider zero-coupon bonds, for example. For the uninitiated, zero-coupon bonds may sound intimidating. In reality, they’re simple to understand. Instead of purchasing a bond that rewards you with a regular interest payment, you buy a bond at a discount to its eventual value at maturity.

One hidden benefit is the absence of reinvestment risk. With standard coupon bonds, there are the challenges and risks of reinvesting the interest payments as they're received. With zero-coupon bonds, there's only one payoff, and it comes when the bond matures. On the flip side, zero-coupon bonds are very sensitive to changes in interest rates and can lose value as interest rates rise; this is a risk factor to be considered by an investor who does not intend to hold a zero-coupon bond to maturity.

Series EE Savings Bonds issued by the U.S. Treasury are another attractive option for conservative investors who do not mind waiting a couple of decades for the investment to double. Series EE Savings Bonds are low-risk savings products that are only available in electronic form on the TreasuryDirect platform. They pay interest until they reach 30 years or the investor cashes them in, whichever comes first. Although the current rate of interest is a paltry 0.10% for bonds issued between November 2021 and April 2022, they come with a guarantee that bonds sold now will double in value if held for 20 years. The minimum purchase amount is $25, while the maximum purchase per calendar year is $10,000. Savings bonds are exempt from state or local taxes, but interest earnings are subject to federal income tax.

Other Types of Investment Strategies

As an investor, you may decide to add other types of investments to your portfolio. Types of securities you can add might be higher risk, but can compliment your index funds. Whatever other securities you decide to add, make sure you align them with your investment goals and do some research before to make sure you know what you’re investing in.

A small cap stock is one from a company with market capitalization under $2 billion. These stocks can be a way to invest in companies that are poised for long-term growth and fast gains. 

Adding small cap stocks to your portfolio through an index fund is a good way to incorporate small cap stocks to your investment strategy. A popular small cap index fund is the Russell 2000 index which tracks 2,000 small cap companies across a variety of industries. Of course, there’s no guarantee that a small company will survive, and initial performance isn’t a guarantee it will continue. 

Blue Chip Stocks

Blue chip stocks are shares of large, well-known companies that are household names – think Disney, Amazon, and Johnson & Johnson. These stocks are thought of as being reliable, safe, and able to weather economic downturns over the long-term. 

To identify blue chip stocks, take a look at the Dow Jones Industrial Average. Because they have a proven track record, having blue chip stocks can add stability and reliability to your portfolio. If you have an S&P 500 or total market index fund, chances are you have good exposure to these stocks already. A blue chip index fund or ETF is a good way to start investing in these. The SPDR Dow Jones Industrial Average ETF Trust is one of the most popular blue chip funds because of its low fees. You can also purchase shares directly through your brokerage. 

Real Estate and/or REITs

Buying a property often requires upfront costs like down payment and fees for closing, on top of any renovations you choose to make. There are also ongoing (and perhaps unexpected) costs, like maintenance, repairs, dealing with tenants, and vacancies if you decide to rent out the property. 

If homeownership isn’t for you, you can still invest in real estate through real estate investment trusts (REITs). REITs allow you to buy shares of a real estate portfolio with properties located across the country. They’re publicly traded and have the potential for high dividends and long-term gains. 

“REITs have done superbly well this year. They don’t usually do well with a pandemic, but surprisingly, they have,” says Luis Strohmeier, certified financial planner, partner, and advisor at Octavia Wealth Advisors. Part of the reason is you get access to properties, such as commercial real estate and multi-family apartment complexes, that could be out-of-reach for an individual investor.  

On the flip side, dividend payments earned through REITs are taxed as ordinary income instead of qualified dividends, which may cause you to have a higher tax bill if you invest through a taxable brokerage account. When you invest in a REIT, you’re also inherently trusting the management company to scout income-producing properties and manage them correctly. You don’t get a say in which properties the REIT chooses to purchase. But with that said, you don’t have to deal with tenants, repairs, or find a big down payment to start investing. And if you can invest through a tax-advantaged account, the dividends could grow tax-free. 

Invest in brokerage accounts that reduce taxes

Just as owning the right investments will help you reach your financial goals, where you invest is just as important. The reality is, people don't consider the tax consequences of their investments, which can leave you short of your financial goals.

Simply put, a little bit of tax planning can go a long way. Here are some examples of different kinds of accounts you may want to use on your investing journey. In each of these accounts—except for a taxable brokerage—your investments grow tax free..

What is the best way to invest money?

1. Invest for a minimum five years

To get a decent return, you should invest for at least five to ten years. The longer you invest your money, the more time you have to:

  • Accrue returns on your investment portfolio
  • Ride out any market downturns
  • Let your returns compound (grow in a snowball effect over time as returns get reinvested)

2. Choose a low cost platform

Fees can erode your pot over time, so we have outlined some of the best platforms for both cost and customer service here.

According to investment platform Vanguard, if you invested £10,000 for 30 years, assuming investment growth of 5% a year, your pot would be:

  • 2% fee = £24,270
  • 0.5% fee = £37,450

Watch out for early exit charges to access money within a few years of investing as well, as these can run into hundreds of pounds.

What makes a good short-term investment?

Good short-term investments may have many things in common, but they are typically characterized by the following three traits:

  • Stability: Good short-term investments don’t fluctuate too much in value, as many stocks and bonds do. The money will be there when you need it, and is often protected by FDIC insurance or a government guarantee.
  • Liquidity: A good short-term investment usually offers high liquidity, meaning that you can access the cash invested in it quickly. In the case of certain CDs, you’ll know when the money becomes available, and you can always redeem the CD, though it will often come with a penalty, unless you opt for a no-penalty CD.
  • Low transaction costs: A good short-term investment doesn’t cost a lot of money to get into or out of, unlike a house, for example. That’s especially important when yields on short-term investments are at historical lows.

These features mean that your money will not be at risk and will be accessible when you need to use it, which is one of the major reasons to have a short-term investment. In contrast, you can earn a higher return on long-term investments but must endure more short-term volatility. If you need that money, though, you might have to sell at a loss to access it fully.

2. Invest in a money-making course

Investing in yourself is one of the best possible investments you can make. While you might not be able to pinpoint an actualized return on investment, there’s no money that’s better spent. Invest in yourself. Invest in your education. Learn. Adapt. Grow. Discover what you’re passionate about.

There are loads of money-making courses on the internet. The hard part is choosing the right one. From ebooks to social media marketing, search engine optimization and beyond, the possibilities are endless. While many money-making gurus might pop up on social media, not all courses are created alike. Spend time doing your due diligence and research to choose the one that’s right for you.

Related: Mark Cuban’s 3 ‘Smart Money Moves Everyone Should Make’

7. Commodities

Prices for raw materials like oil, metals and agricultural products usually increase along with inflation, so they can be a good hedge against it.

Investors, however, should note that commodities can also be extremely risky, Arnott adds. The prices for commodities depends largely on supply and demand, which can be highly unpredictable. This makes them a risky investment, on top of investors taking on leverage: The chance of rewards are high, but so are risk of the losses.

Can an Investor Use All Five Ways in the Quest to Double Ones Money?

Yes, of course. If your employer matches contributions to your retirement plan, take advantage of that perk. Invest in a diversified portfolio of stocks and bonds and consider being a contrarian when the market plunges or rockets higher. If you have the risk appetite and want some sizzle on your steak, allocate a small portion of your portfolio to more aggressive strategies and investments (after doing your research and due diligence, of course). Save on a regular basis to buy a house and keep the down payment in a savings account or other relatively risk-free investment.

6. Trade options

When it comes to options, Tom Sosnoff at Tastyworks says, “Trade small and trade often.” What type should you trade? There are loads of vehicles, such as FOREX and stocks. The best way to make money by investing when it comes to options is to jump in at around 15 days before corporate earnings are released. What type should you buy? Money calls.

The optimal time to sell those money calls is the day before the company releases its earnings. There’s just so much excitement and anticipation around earnings that it typically drives up the price, giving you a consistent winner. But don’t hold through the earnings. That’s a gamble you don’t want to take if you’re not a seasoned investor, says John Carter from Simpler Trading.

Related: 2 Strategies for Making Money Day Trading With a Bit Less Risk

Certificates of Deposit (CD)

If a 1% yield doesn’t get you excited, you might consider purchasing a CD or a basket of CDs. One strategy that can help reduce interest rate risk and potentially increase overall returns is what’s known as CD laddering.

What to Consider Before Investing and Why Long Term Investing is Key

As you begin your investing journey, consider first where you’d like to hold your investments. That could be a taxable brokerage account, an employer’s 401(k), or a tax-advantaged IRA. If you want to invest in real estate, decide if physical properties or REITs match your investment style. 

Then, assess your risk tolerance and how long you want to invest. Keep in mind that, due to compound interest, investing long-term (10+ years) is the most assured way to grow your money. 

It’s perfectly fine to invest entirely in low-cost, diversified index funds. “Adequately diversified investments with a long track record of growth is the key to building wealth,” says Stohmeier. That way, you’re also able to withstand market dips while giving your cash the best chance to grow.

5. Real estate

Real estate traditionally does well during periods of higher inflation, as the value of property can increase. This means your landlord can charge you more for rent, which in turn increases their income so it is on pace with the rising inflation.

Beyond home ownership, real estate investments can be made through REITs (also known as Real Estate Investment Trusts) or through mutual funds that invest in REITs.

The post-pandemic era, however, may change how real estate responds to higher inflation. "Fundamentals are somewhat in question because of the long-term effects of Covid," Arnott says. Demand for commercial real estate, such as office and retail spaces, is still in limbo as more companies are adopting remote work or hybrid models.

What Investments Give the Best Return?

If the purpose of investing is to grow your wealth over time, you should prioritize the type of investment that gives you the best return, right? 

Among the various types of investments, the stock market is the place to invest to get the best returns.

When you learn Rule #1 investing, you can achieve average annual returns upwards of 15%. Rule #1 investing is a stock market investing strategy focused on buying wonderful companies on sale.

A wonderful company is one that will continue to grow as the years go by, surviving whatever challenges the market may throw at them along the way. If you are able to find these companies to invest in, you can certainly get the best returns on your investments.

You don’t just have to invest in singular stocks, though. Putting some of your money into a stock market index fund is also a good practice.

If you are more risk-averse, or only ready to dip your toe into the stock market at this point, that’s OK too, but keep in mind nothing will grow your money quite like investing in the stock market can.  

Bottom Line

There are no such things as completely risk-free investments. Even the safe investments listed above come with risks, like loss of purchasing power over time as inflation rises. The key is to consider your own individual needs and put together a portfolio that offers sufficient stability while still allowing you to take advantage of growth over time.

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