TOP 5 SHORT-TERM INVESTMENTS

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1 INVESTING: MAKING YOUR DOLLARS WORK FOR YOU TOP 5 SHORT-TERM INVESTMENTS A good financial strategy includes choosing a time frame for your various investments. Long-term investments to finance such projects as buying a home or retiring are important elements of a solid financial strategy, but it s also smart to include some short-term investments in your portfolio. Most investors consider five years to be a short term, but you can define what short-term means to you, since it is possible to invest your money for a couple of months if you feel that this is a better time frame for your goals. There are three main things to consider when investing in the short-term: 1. The liquidity of the asset. If you think you might need to access your money right away in the future, look for an asset that is easy to liquidate at any time. 1

2 2. The return on the investment. Stay away from investments that sound too good to be true and look at products with a yield that matches your goals. 3. The risks. There are no investments without risks, but it s possible to choose investments with low risks. Always ask yourself how much you can afford to invest, what kind of yield you expect, and how much exposure to risks you are comfortable with. These questions will help you select investments that match your goals. These five products are some of the best short-term investments to add to your portfolio. SAVINGS ACCOUNTS Savings accounts are the safest way to invest your money. All you have to do is place money in an account and wait for interest to start adding up without having to worry about risks. Consider these advantages of a savings account: 2

3 1. Your money is not tied up. You can access your savings account at any time to withdraw or add more funds. 2. It is easy to determine how much your investment will yield. Savings accounts have a stated interest rate. However, different banks may pay different interest rates, so it helps to shop around. 3. There is no need to actively manage this investment. You just let your money sit and draw interest. The downside is that savings accounts have a low interest rate. Most U.S. banks offer annual percentage yields below 1%. However, you can find savings accounts with higher interest rates by choosing online banking institutions, foreign banks, or by investing a foreign currency in a savings account. Take the time to shop around to find a savings account with a good interest rate, select a bank or a credit union insured by the FDIC or NCUA, and take banking fees into consideration when calculating your yield. 3

4 CERTIFICATES OF DEPOSIT Certificates of deposit are issued by banks to individuals who deposit money for a specific time frame. You will get your money back plus interest once the time period is up. Certificates of deposit are a must-have financial product if you re building a short-term portfolio since they carry a number of benefits: 1. No risk. There are no risks of losing your money as long as you purchase certificates of deposit from institutions insured by the FDIC or NCUA. 2. The maturity date varies from one certificate to another. You can choose a certificate of deposit that will pay out in a couple of months or select one with a maturity date five years from now, depending on your goals. 3. The yield is attractive for a safe investment. Shop around to compare interest rates and try investing as much as possible once you find a good option, since interest rates are usually a little higher for larger investments. 4

5 4. It is possible to find banks and credit unions that let you purchase certificates of deposit while giving you instant access to your money. You will not earn any interest if you withdraw the money before the maturity date, but this could be a good option if you would rather not tie up your money. 5. Certificates of deposit are passive investments. There is no need to manage your investment. Certificates of deposit carry low risks and usually have a very interesting yield if you select the right bank or credit union. The average APY varies between 0.65% and 1.25% depending on the institution and minimum deposit limit you select. Certificates of deposit are an ideal option if you want a safe way to invest your money and want the freedom of choosing a maturity date that matches your financial goals. I BONDS I bonds are your best option against inflation. These bonds are very easy to buy through the U.S. Treasury and don t require you to actively manage your portfolio. 5

6 These are the main advantages of adding I bonds to your portfolio: 1. The interest rate is calculated based on an inflation rate and a fixed rate. The fixed rate is set at the time of the purchase. The inflation rate is calculated and adjusted every six months. 2. I bonds are purchased and cashed out through the U.S Treasury. There is no need to pay fees or to actively manage your portfolio. 3. Low risk. The risk is fairly low due to the fact that I bonds are sold through the U.S. Treasury. Also, your return is always based on the adjusted inflation rate. The downside of I bonds is that your money is tied up for five years if you want the best results. You do have the option of selling these bonds before their maturity date, but you will lose the interest for the past three months. The current interest rate is set at 0% for I Bonds due to deflation, but this rate is re-calculated every six months. New rates are set on May 1st and November 1st and will go up again if inflation is recorded. The amount you can invest in I bonds is limited to $10,000 a year per person. 6

7 BOND FUNDS A bond fund is a mutual fund that invests mostly in bonds, while regular funds invest in stocks. This is one of the most flexible short-term investments with a high yield. The most difficult aspect of investing in these funds is the selection process, since not all funds perform well. Keep these points in mind when choosing bond funds for your short-term investing: 1. Most bond funds include monthly payouts as well a yearly capital appreciation. Interest rates and capital appreciation vary from one fund to another. 2. Bond funds have a high liquidity. You can sell your shares or purchase more at any time. 3. Bond funds are not as accessible as some investment products due to possible high fees and high initial investment. However, it is worth it to make a large investment in a bond fund that performs well. 4. There are risks associated with investing in a bond fund. These funds are safer than funds that invest in 7

8 stocks, but a widespread panic could lead to a bond fund losing its value. Bond funds are the ideal option if you have a lot to invest, want a flexible time frame, and are looking for a high yield. Compare data on different funds to find an investment option that has been yielding consistent profit over the past few years. The average yield of a bond fund varies, depending on the type of bond and the length of the investment. For instance, you can expect a yield just under 1% for a oneyear investment in a corporate bond fund, while a 3% return is possible if you invest in a preferred stock bond fund for a year. These same investments would respectively bring in a return of 5% and 8% or more over a five year period. BANK-LOAN FUNDS Investing in bank-loan funds is the best way to protect your portfolio from fluctuating interest rates. Purchasing shares of a bank-loan fund means you own a portion of a corporate debt to a bank. 8

9 Bank-loan funds are an attractive option since they carry low risks, but there are a few things to be aware of: 1. Bank-loan funds generally have a high yield. The yield can increase if the interest rate goes up. 2. Your money is tied up for at least a year. Bank-loan funds have a somewhat low liquidity since most banks will let you sell your shares only once a quarter. 3. There is always the risk that the corporation will go bankrupt and stop making payments on the loan. However, banks usually collect on unpaid loans before other creditors. 4. Bank-loan funds carry higher fees than the average fund. Paying a high fee is worth it if you can invest a significant amount. Bank-loan funds are a little riskier than other financial products, but they are an ideal option if you re willing to take a few risks for a higher potential return. You do not need to actively manage your portfolio other than keeping track of when the next selling period will come up. You can expect to earn a little over 1% if you invest for only a 9

10 year but could get a return of 5% or more on this investment if you can tie up your money for five years. CONCLUSION These financial products are some of the best short-term investments you could add to your portfolio. Select the most relevant options, depending on how much you want to invest, the time frame you are interested in, and your willingness to take risks. Try investing in more than one of these options to build a more diverse portfolio. For instance, you could open a savings account to put some money aside without taking any risks and invest in a bond fund to boost the overall yield of your short-term portfolio. 10

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