Definition of Short-Term Investment
The term “short term” typically refers to a holding period for an investment of less than three years. Many securities, including stocks, mutual funds, certain bonds, and bond funds, may not be suitable for periods of less than three years. Most investors have long-term plans. They save for goals such as retirement, with time horizons extending for several years or even decades.
Note: “Short term” can also describe investors.
The advisor who asks questions to measure your risk tolerance is trying to determine the types of investments that are appropriate for you and your goals. You would be considered a short-term investor if you told your advisor that your goal is to save money for a vacation you plan to take in two years from now. Short-term investment types would be ideal for such saving goals.
Individual stocks and shares of mutual funds have no specific maturity or expiration dates. Investing short term in these assets means you intend to hold them and then sell them at some point before the end of a three-year period.
You would choose bond issues that mature in three years or less if you were directly purchasing bonds to hold in your portfolio rather than through a bond fund.
Short-Term Investment Performance in Investment Analysis
A one-year timeframe does not provide a strong insight into the future prospects of a fund when analyzing investments. This is especially true for actively managed mutual funds. One-year timeframes do not provide you with enough information about a fund manager’s ability to steer a portfolio through a full market cycle. This includes periods of recession as well as growth. It encompasses both bull and bear markets.
A complete market cycle typically spans three to five years. Therefore, analyzing performance returns over three, five, and ten years for a fund is significant. You want to know how the fund performed during the market’s ups and downs. The short term (less than three years) is not useful when looking for mutual funds for long-term goals.
Exploring Short-Term Investment
Suitable types of investments include money market funds, certificates of deposit (CDs), and bond funds that invest in short-term bonds, and bonds that mature within three years or less if you have a savings goal for three years or less. Long-term options, such as stocks and stock mutual funds, carry significant market risk in the short term.
Investing in stock mutual funds is quite risky if you think you might need your money within three years. Any extended period of low prices could leave you with less capital than the original amount you invested. Low prices occur during bear markets.
Where to Invest Short Term
You have some good options if you’ve decided you want to invest your money in a way that achieves a higher return in the short term than your regular savings account while also providing stability.
High-Yield Savings
The average interest rate on savings accounts was 0.06% as of April 19, 2021. You can find much higher rates than that by setting up an account at an online bank. These banks can use the funds they do not spend on brick-and-mortar buildings to pay their customers higher rates.
Note: You may find a good high-yield savings account at your credit union.
Certificates of Deposit (CDs)
You can find certificates of deposit with terms ranging from three months to five years. You’ll earn a higher interest rate the longer you are willing to lock up your money. The rate will be higher than the interest rate on high-yield deposits. Your funds will also be protected by the Federal Deposit Insurance Corporation (FDIC). However, you’ll incur a penalty if you withdraw the money before the certificate’s term ends.
Accounts
Money Market
Money market accounts are also insured by the FDIC. You can protect your money while investing it. These accounts typically pay a little more than the interest rate on savings accounts.
Note: Understand the difference between a money market deposit account and a money market mutual fund. The mutual fund version is not insured by the FDIC.
You should be able to write checks using a money market account, and you may also get a debit card. However, these accounts are often limited to a small number of transactions each month.
A money market account typically pays slightly less than inflation. So keep that in mind when deciding how long to keep your money there. These accounts often also require a minimum deposit.
Bond Funds
A short-term bond fund is an option that will pay you more than other options. The short term refers to the maturities of the bonds held within the fund in this case. The bonds have maturities from one to five years. The bond fund manager buys bonds with staggered maturities. Then they replace them with new bonds as needed.
You can keep your money in fund shares for a full three years or for a shorter period you may wish. Bond funds that invest in short-term securities often have less negative effects from changes in interest rates than funds that invest in long-term bonds.
You can also diversify your investments by purchasing shares in bond funds that contain a mix of corporate, government, and municipal bonds with various maturity periods. This will protect you during your short-term time frame.
The trade-off is that the returns on bond funds are slightly less stable. You won’t get FDIC protection on your money. They offer the potential for higher returns. But you’ll need to meet minimum investment requirements.
Disclaimer: The information provided on this site is for discussion purposes only and should not be considered investment advice. Under no circumstances does it constitute a recommendation to buy or sell securities.
Source: https://www.thebalancemoney.com/short-term-investing-and-performance-2466577
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