While long-term investment options yield high returns, sometimes investors prefer short-term alternatives. An investor looking to raise money for a down payment on a house he plans to buy in five years, for example, will opt to invest in a low-risk, short-term investment. As such, the investor will avoid spending the money on stock options, though they yield up to 10% returns per year in the long-term.
In the recent years, the stock market has become rather volatile, forcing investors to diversify their portfolio by looking for short-term investment alternatives. Our discussion deliberates on some of the easiest and safest ways to invest in 2017.
Money Market Mutual Funds held by Banks
The investment option allows investors to hold short-term government bonds (and in some cases, triple-A-rated corporate debt) that mature in 30-90 days. MMFs are readily available in banks, brokerage firms such as CMC markets and investment banks.
They are organised like trusts in that they pool investor’s savings into a fund with the only difference being that investors are restricted to the type of investment they can make. Investors can redeem their shares on demand at the initial buying price, and they are allowed to write checks on the accounts.
Certificates of Deposits Ladder
They are also referred to as time deposit accounts where banks and credit unions offer lucrative fixed interest rates in exchange for retaining one’s monies in an account for a predetermined period. The term lengths range from several months to five or more years while the interest rate depends on the amount invested in the account and the maturity period.
Unlike the previous option, CDs don’t allow investors to redeem their money on demand. On the contrary, a hefty penalty is charged if you withdraw the money before the maturity date. The best way to maximise returns on CDs is to plough back the short-term proceeds in CDs with longer maturity terms.
For instance, someone who wants to invest $10,000 in multiple CDs with different maturity rates and periods such as 1, 2,3,4,5 years, each time one of the CDs matures, he can reinvest the money into a new CD. CD ladders diversify the risk of putting up all your monies in a long-term security.
Online Savings Account
It is the easiest and the safest means to invest your money. It is a low-risk investment alternative that allows you to deposit and withdraw funds at any time without incurring penalties. While the interest earned is low, investors can maximise the yield by choosing a high-yield savings account. Online savings accounts offer higher interest rates as they don’t incur overhead costs like traditional brick and mortar banks.
Peer to Peer Lending
P2p lending allows borrowers to post their loan listings on different peer to peer websites for investors to review and decide on whom they can lend. P2P lending standards are very lenient, and the interest rates are lower than those charged by traditional lenders. Investors purchase loan notes in exchange for a monthly income in the form of interest and loan repayment. Lenders may start out with as little as $25 and later increase the amount they are willing to lend as their confidence grows.
A Roth IRA
While other kinds of retirement accounts slap you with an early withdrawal penalty and income tax for withdrawing funds before retirement, Roth IRA is different. Here, you fund your Roth with after-tax earnings; thus you are free to withdraw any amount of contributions at will.
Treasury Securities (Inflation Protected)
They are marketable securities designed to protect investors from the adverse effects of inflation. Their principals adjust to changes in consumer price index. TIPS have different maturity periods, ranging from five, ten, to thirty years with interest being paid twice a year. Additionally, the interest income is tax exempt. TIPS are a low-risk investment as they are backed by the government and their value increases with inflation.
Whether you are an aggressive or a risk-averse investor, it is important to retain a particular amount of money in short-term investments. Determine the sum of money you want to put in short-term securities and allocate the necessary capital. These rules should guide you when investing in short-term investments:
• Look for a safe investment option for your savings; it should protect your monies from the temporary changes in the market
• Settle for an investment that yields small returns
• Keep the investment liquid