It’s your money, and you need it now! In this episode, we discuss the best short-term investments when you want to earn a return from your cash – without exposing it to a risk of loss.
But first, let’s make sure you understand the context we’re working within. That will help you understand the “why” behind our best short-term investments recommendation, and how you can vet your own investment opportunities.
2022 has been a very full year from a current events perspective. Inflation, rising interest rates, war in Europe, crashing crypto markets, stocks and bonds are down…
It’s enough to leave you wondering, where do I put my money when everything seems… bad?
And it’s reasonable to have this thought, and to start seeking out what feels like better options than markets that are doing poorly. It’s human nature to not just want to avoid the bad thing. You still want to outperform something.
But sometimes, you just need to reduce your risk… not get caught in the trap of trying to be smarter than everyone else. This is definitely the case when it comes to considering short-term investments – and deciding what makes the best short-term investment for you.
When the stock market is bad, seeking out investment options outside stock market starts sounding really appealing. (Hello, crypto mania.)
But we need to bear in mind that the stock market doesn’t only “work” when it’s going up. When the market drops, it means it’s working, too.
It’s an open, free market. People buying and selling are what creates that market. We believe the market is efficient because there are so many participants, and there is so much information and data in all of those trades.
This is good to keep in mind when you start feeling tempted to venture into an investment that seems new, exciting, and promising – especially if that promise includes big returns in a short amount of time.
Quick returns do not usually line up with most people’s risk tolerance and capacity, and this is where the conversation on short-term investments needs to start.
Risk tolerance and risk capacity are different. Your risk tolerance is how you emotionally feel about taking risks.
Risk capacity is your actual ability to take a risk and absorb and recover from the downside if the play doesn’t go your way. And your risk capacity doesn’t care about how you feel about risk.
You cannot give yourself a chance for a big return without simultaneously pushing up the risk factor. On the other hand, you can’t reduce your risk level and also expect to see an increase in return opportunity.
You cannot sidestep risk; you expose yourself to it for a chance at a higher return, or you don’t (and you adjust your expectations for returns accordingly).
So is there a good place to put your money in this environment for the short-term? What do reasonable short-term investments look like? Do they even exist?
Yes, they do! They’re just probably boring, well-known, and extremely unsexy.
When considering a short-term investment, we need to watch out for two major factors that can deal a serious blow to your overall wealth if you do not respect them:
- High risk
Instead, when evaluating a short-term investment, we recommend looking for characteristics like:
- safety and security
- insurance, possibly (like FDIC-insured accounts or backing from the Treasury)
- adding some kind of yield to that money
And give some consideration to what’s happening in the moment. Given the current interest rate environment, there are a number of very safe places you can put your money and earn a small return, such as:
- savings accounts
- money markets
- Treasury bills (possibly notes and bonds, as well)
Also due to current economic conditions, I-Bonds are suddenly big topics of conversation and for good reason: the rates have skyrocketed. This makes them great considerations for shorter-term investors.
You need to hold I-Bonds for at least a year, and you also need to remember the composite rate is variable. There is a fixed and a variable factor that determines the rates.
If you need your money in 1 to 5 years, this could be a choice to consider. If you need your money in 20 years, however, there are better investment vehicles to use to meet your goals.
Think about why you’re looking into short-term investments. If you want to buy a house, fund a big goal, take a lavish trip, etc in the next 1 to 5 years, you need that money when you need it, so you can’t put it at risk of loss.
At the same time, you might not want to leave so much cash sitting around not earning anything… and this is where a “what is best short-term investment vehicle” conversation comes into play.
Again, something like high-yield savings accounts or CDs can be a great option right now, given the higher interest rates awarded to savers at this time.
That’s the recap. Now jump into the full conversation here:
Further Reading & Links from This Episode on the Best Short-Term Investments
- Don’t miss our episode that dives more into recent headlines – and what they can teach us about our own personal finances
- Info on I-bonds (via Treasury Direct, which is where you go to buy them if you are interested)
- Nerdwallet is a great resource for checking and comparing interest rates on bank accounts, CDs, and more
- You might also like this episode, where we discuss what it takes to manage investments well
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