If you have some cash that siting in a savings account that is earning a measly 0.01%. You have plans to spend this money on a new car or home renovations over the next few years. You may be wondering how to invest your money over the short-term to earn the most interest.
It is known as short-term investing and it can be complex. For example, if you put your cash in the stock markets, you may lose it all before you really need it. When you put the money into one of the traditional savings accounts, it will earn basically nothing. Yet there are many options when it come to the best short term investments.
What Is A Short-Term Investment?
There are no official definitions when it comes to the best short term investments. In addition, there also is no governing-bodies which gives a definition for what long-term and short-term investing is.
Yet many experts suggest that short-term investing is the act of investing cash you are planning to spend in less than 5 years.
The reasons behind why it is less than five years, is that in most cases stock markets will not lose money in a period of 5 years or less. However, it can. When looking back to the 1930s and the 1940s there were 5-year periods where the markets were crushed, with 1932 displaying the worst year. The 5-year period that ended in this period experienced a significant drop of 60.9%.
Yet this is very rare.
When we have a bear-market or significant stock-market correction, it will usually take people a minimum of 5 years to pull out. Of course, this is not guaranteed. We might hit the bear-market where it could take as long as 10 years to pull-out.
Either way, most experts suggest 5 years is where you should draw your line. However, it does come down to personal preferences and you may want to draw your line less or more conservatively. Here is some important information that will hopefully assist you in making a better decision for the best short term investments.
9 Of The Best Short Term Investments
- CD- Certificate Of Deposit
One of the recommended options for short-term money investing includes CD which stands for Certificate of Deposit. CDs offers a lot more choices than a regular savings account. The terms for CDs also range from a couple of months onto over 5 years. The longer terms translate into higher rates.
The higher rates do come with added risks, and here is why:
You can cash a CD in before the maturation date. For example, you may have chosen a 5-year CD investment, but after the 1st year you make the decision to draw your money out. If you do decide to draw your money out early, many of the CDs will charge you with a penalty. The penalty will vary from bank to bank and the CD product you have chosen.
For this reason, it is always advisable to keep your cash in the CD until the chosen maturity date. As a result, choosing the length of your CD is a vital decision. Here is a list of the pros and cons of choosing CDs as your best short term investments.
– CD terms range from 6 months onto 5 years or even longer
– FDIC insured
– Better interest rates on the longer-term CDS
– The ability to create CD ladders
– You will be charged a penalty if you decide to withdraw your money before the maturity date
– The interest rates are still somewhat low
The expected annual returns on CDs range from 1.00% to 2.50%
The list of the banks that offer the highest-yield CD options include the following:
– Marcus By Goldman Sachs
Offer a 6-year CD account with an annual return of 3.15%. The minimum deposit for this CD is $500.
– Citizens Access
Offer a 5-year CD account with an annual return of 3.15%. The minimum deposit for this account is $5,000.
– Synchrony Bank
Offers a 5-year CD account with an annual return of 3.10%, with a minimum deposit of $2,000.
- Lending Club
The Lending Club provides a number of great options along with a potential for much better returns. Their P2P lending-platform offers an easy way to make an investment in companies, individuals or loans.
It is also the ideal option for short-term lending. Loans available through this platform are for 3 or 5 years. If you are sure you will not need this money for 3 or 5 years, then Lending Club is a very reasonable alternative to consider.
For example, some investors have invested in the Lending Club loans since this platform first launched. Many state that their annualized returns that include loans that have defaulted is well over 8%.
With the higher returns, it is accompanied by higher risks. The loans will go into collections as well as eventual default every now and again. The key to using a platform like this is diversity. For example, you are able to invest in one loan for $25. In the way of diversifying across a number of different loans, you can minimize effects on what defaults will have on the portfolio.
– It is easy to make investments in a loan portfolio that is diversified
– There is a favorable potential to achieve much higher returns over the short-term
– There is a potential to lose your money
– You are unable to liquidate a loan early
– Not FDIC insured
- Online Savings Accounts
The traditional banks often pay about 0.01% on savings account. This is lowest way to earn interest on your savings.
One of the options for a short-term savings plan that will pay out more is to choose one of the online banks. While the rates are not that great, some of the best online savings accounts pay around 1.30%.
– You can choose to withdraw your funds whenever you want to
– FDIC insured
– No fees
– The rates are better in comparison to the brick-and-mortar banks
– Inflation exceeds these rates
– The interest rates with this option is still low
Here is a list of the online banks that offer the best interest rates:
With a minimum deposit of $500, this online bank offers an annual return of 2.30%.
– Citizens Access
With a minimum deposit of $5,000 this online bank offers an annual return of 2.25% on your investment.
With a minimum deposit of $100, this bank offers an annual return of 2.15% on your investment.
- Investing With Betterment
Betterment is one of the best short term investments options as it offers interesting opportunities dedicated to the short-term investors. It actually is not classified as an investment, but rather is a type of online company that offers an easy way to invest in Stock and Bond ETFs.
These services are useful for any type of investment which includes long-term retirement investing. However, to use Betterment for the purpose of short term investments you need to ensure you get your asset-allocation right.
Betterment allows its investors to make a decision on the amount they would like to put into stock ETFs and the amount to put into bond ETFs. When it comes to short-term investing, the 50/50 allocation will protect you against the downsides while still allowing for potential higher returns.
50% in stocks will give you the opportunity to earn a greater return, while 50% of your investment in bonds will help to protect you from market crashes. However, there is no guarantee, but even when you look at the 50/50 portfolio during the market crash from 2008 to 2009, it will give you some reassurance.
For example, if you invested $10,000 at the beginning of 2008 assuming you needed your money back 3 years later, how would your 50/50 portfolio perform in the 3-year period. Keep in mind that in the year 2008, the U.S stock-index fund went onto lose over 37%.
Your portfolio would have lost money in the year 2008, yet a lot less when compared to the 37% that the actual markets dropped. And what would your final portfolio-value have been by 2010? It would have grown to $11,014 with an annual return of 3.27%.
While 3.27% may not seem like such a good return, keep in mind that 2008 was an extremely bad year when it came to stocks. Now shift the time frame a year forward from 2009 to 2011 and your annual return would have increased to just under 11%.
So, it is safe to say that a 50/50 portfolio with Betterment is one of the more reasonable choices if you need your money within a time frame of either 3 to 5 years.
– You can draw your money out whenever you need it
– It is simple to implement
– The fees are extremely low
– You are offered with a potential for returns that are much higher
– There is a potential to experience capital losses
– This option is not FDIC insured
The expected annual returns can range from 0% to 10+%
- Short Term Bonds
Another option for the best short term investments would be intermediate or short-term bond-funds. To be more specific you would want to look at the low-cost ETFS and index mutual-funds. Fidelity and Vanguard offer a number of different options.
If you do decide to invest in short-term bonds you will have a few essential choices that you will need to make. Would you like funds that only invest in U.S government bonds or a fund which invests in the corporate bonds? You will also need to decide if you want intermediate-term bond funds or short-term bond funds?
Similar to just about everything else, these choices will involve a trade-off.
For example, the U.S Government bonds will be more secured when compared to the corporate bonds, yet they will pay out less. The short-term bonds are also less sensitive when it comes to the interest-rate fluctuations when compared to intermediate-term bonds, yet they will pay less. Currently, the government short-term bonds will not pay a lot more in comparison to the online-savings accounts. An example of this includes the SEC yield through Vanguard’s short-term Treasury fund is only 1.25%.
For most people, they want to do a lot better than this in bond funds. While the intermediate term-funds have the potential to lose money within any of the given years, they are still somewhat stable. VBILX (Vanguard’s Intermediate-Term Bond Index Fund) for example costs only 0.07% and sports SEC yields of more than 2.50%.
– While they may not be FDIC-insured, they are still regarded as secure
– The intermediate-term bonds have the potential to yield much higher rates when compared to savings accounts
– You can withdraw your money out of the fund if your need it
– You can lose your money
– They are not FDIC-insured
– The rates historically are low
The expected annual returns on this option range from 1.00% to 6.00%.
- Municipal Bonds
One of the main downsides when it comes to bonds has to do with taxes. The interest that you earn on your bonds will be taxed, similar to any of the capital gains.
One of the options available to lower the tax burdens is to choose the municipal bonds which are referred to as “munis”. These are the bonds that are usually free from federal income-tax and might also be exempt from state-income tax. The Munis are the ideal option if you fall into the “higher” federal tax bracket.
Many people have invested in the VWIUX (Vanguard’s Intermediate-Term Tax-Exempt Fund) and the SEC yields for these funds is lower when compared to similar types of taxable bonds. These comparisons should be made on the after-tax basis. Currently this fund sports SEC yields of around 2%.
– The potential for a higher return
– Comes with tax advantages
– You are offered with access to your funds without having to incur a penalty
– The potential to lose your money
– Not recommended for people in the lower tax-brackets
The expected annual returns for the municipal bonds is between 2% to 5% after tax.
Similar to Betterment, Wealthfront is one of the robo-advisors that offers an easy way to invest. One of the reasons this option is rated as the best short term investments options is that it is for free.
Well actually it will be free on your first $10,000. From here the costs involved are similar to Betterment. You will also pay extremely low fees that are charged by ETFs. You will also pay a Wealthfront or Betterment fee of around 25 basis points. However, with Wealthfront the 25-basis point fee will be waived on your first $10,000.
– Simple to implement
– Fees are extremely low
– You are able to withdraw your money whenever you like
– It offers you with the potential for far higher returns
– There is a potential to experience capital losses
– Not FDIC insured
The expected annual returns with Wealthfront are between 0% and 10%.
One of the downsides to the traditional bond-funds is the potential for capital losses because the funds sell some of the bonds in order to purchase new ones. If the interest rates have gone up, the fund will incur a loss on sales of these bonds.
This is when Guggenheim’s Bulletshares come in. These are ETFs that combine potential returns associated with the bond-fund with a fixed maturity of the CD.
The traditional based bond-funds will continue in what is known as perpetuity. This means the fund-management will frequently sell the bonds as the maturities have aged and then replace these with a new bond linked to a longer maturity. In comparison, the Bulletshares have defined terms of 1 to 10 years.
When the term comes to an end, the assets will be returned to the existing shareholders. Unlike the CDs, the shareholders are allowed to sell their ETF shares when ever they want without incurring a penalty.
The Bulletshares are available in two types: 1: the corporate bonds, 2: the high-yield corporate bonds. The corporate bonds invest in the investment-grade corporate bonds. While the second type purchases bonds that are issued by the corporations with credit ratings that fall below the investment grade. This will involve more risks, yet it offers the potential for higher returns.
For example, Guggenheim BulletShares 2020 High-Yield Corporate Bond ETF is currently offering a yield-to-maturity of more than 5%.
– Fixed maturity dates
– You can choose to sell your EFT shares when you want
– The potential to yield much higher returns
– Your funds have the potential to lose money
– Not FDIC insured
The expected annual returns average from 1.50% to 5.50%.
The last of the best short term investments options comes with a twist that is interesting associated with online-savings accounts. SmartyPig combines offers a high-yield with your savings goals. Since August 2018, SmartPig now offers the high-yield savings APY of 1.55%.
With SmartPig you get to set a specified savings goal. You can choose one savings goal or multiple ones. All you need to do is deposit into this account until you have reached your goals. This is one of the ideal options for the short-term savers.
– The potential to achieve a higher return when compared to other online banks
– FDIC insured
– Makes saving for specific goals incredibly simple
– Still a low rate when compared to the other options
The expected annual returns are estimated at 1.00+% dependent on your account balance.
Are The Stock Markets A Good Place For The Best Short Term Investments?
Many people who are interested in short term investments often ask why they should or shouldn’t put all their money into the stock markets?
This is a very relevant question, especially when the markets are rising, missing out on making money can feel painful. Well the main reason why it is usually recommended as a very risky way to earn interest on your investments is that you can lose all your money over a very short time frame.
For example, if you had to go back to 2007, using Vanguard S&P 500 index fund as an example. Let’s assume you invested $10,000 at the beginning of 2007 that you will need back in 3 to 5 years.
At the end of the 3-year period, your investment would have decreased to $8,395 and your annual-return would have yielded -5.66%. If you waited for the end of a 5-year period, you would have been left with $9,837, with your annual return ending up at -0.33%.
It is true that 2008 was a very bad year, but this is the exact point. Investing all your short-term cash in the stock markets poses a risk that is significant for losing your capital. Luckily there are many better options to invest your money over the short term.
Tips On Managing Your Short-Term Investments
Managing your investments might turn into a hassle. This is especially true when you have a number of IRAs, various 401ks, along with taxable accounts. Not to mention your bank accounts. One of the best ways in which to analyze and track your investments is with the financial dashboard with Personal Capital for free.
With Personal Capital you are able to connect to any of your 401(k), IRAs, 403(b) along with any of your other investment accounts all in one place. Once you connect, you are able to view performance on all your investments as well as evaluate your asset allocations. Personal Capital also offers a Retirement Planner for free. This is a valuable tool that will give you accurate information on if you are on the right path to retire when you want to.