The stock market is a great place to invest in your retirement portfolio with long-term plans, but what about investors with more short-term goals? For these investors, ensuring the protection of principal and some income potential is more important than overall growth.
Here short-term investment can play an important role. These instruments come in different asset classes, but they all share some commonalities: minimal market risk, low-interest rate risk, and the potential for some income generation.
John Crook, head of active fixed-income product management at Vanguard, said: “These products are best suited for investors who are saving for large expenses (eg, down payments, college tuition, major purchases, etc.) with a time horizon of approximately one to three years. .”
“Short-term funds may also be a logical ‘first step’ back into bonds for investors who have abandoned a traditional fixed income strategy amid losses to 2022,” says Croke. “Short-term funds can be a good starting point for those concerned about further potential interest rate hikes that the market has not already anticipated,” he says.
With that in mind, here are some of the best short-term investments recommended by other experts to generate income:
Treasury bill ladder
Anessa Kustovic, chief investment officer at Cardinal Retirement Planning, recommends Treasury bills, or “T-bills.” These are short-term bonds issued by the US federal government with a maturity of one year or less. T-bills are considered “risk-free” by default and have low-interest rate sensitivity.
Custovic particularly likes four-, eight- and 13-week T-bills. “Rates are very attractive now and you’re not locking your money away for a long time,” she says. To better plan cash flows, Kustovic recommends building a “ladder” of different maturities.
“For example, suppose an investor has $30,000 to build a ladder. This investor invests $10,000 in three-year Treasury notes, $10,000 in 52-week T-bills, and $10,000 in 13-week T-bills. can. As each matures, the investor gets guaranteed cash flow to reinvest or spend as they see fit,” says Kustovic.
High Yield Savings Accounts
Investors who want more flexibility and liquidity in terms of their investments can use more traditional bank offerings such as the High Yield Savings Account, or HYSA. HYSAs are protected by the insurance up to $250,000 per account by the Federal Deposit Insurance Corporation, or FDIC.
Thanks to rising interest rates, HYSAs are now paying more competitive interest rates, which are expressed as the account’s annual percentage yield, or APY. Investors willing to shop around can find competitive rates from some banks with additional features like no monthly fees or minimum balance requirements.
Austin Delery, the wealth advisor and partner at Olivier Group, LLC, notes that many local and online-only banks are paying up to 4% interest on HYSA with some restrictions. “At the end of the day, the most important feature of a short-term investment is the flexibility to cash out,” he says.
Certificates of Deposit
Short-term investors willing to commit to a lock-up period can target higher yields than HYSA by investing in certificates of deposit, or CDs. By investing in CDs, investors receive interest on their investment, but cannot withdraw their principal investment before maturity.
Allen Mueller, director of financial planning at 7 Saturday Financial, notes that CDs are currently making a comeback due to high-interest rates. “Depending on the bank, the rate on a 12-month CD can be as high as 4.6% right now,” he says. Investors who commit to a longer-term can earn even higher rates.
Muller also likes CDs for their sense of security. “There is no risk of principal loss, but if you redeem early, you will pay a penalty that varies by institution,” he says. Therefore, they are not best for investors who need flexibility. Like HYSAs, CDs are FDIC insured for up to $250,000 per depositor account.
Series I Savings Bonds
With inflation continuing to climb in 2022, one of the more desirable investments was a Series I savings bond, also known as an I-bond. These special government bonds pay a variable interest rate that changes with inflation, set twice a year for six-month periods.
Currently, the rate for I-bonds issued from November 1, 2022, to April 30, 2023, is 6.89%. Since these bonds are issued by the federal government, there is essentially no risk of loss. However, investors are limited to $10,000 in purchases per year electronically plus an additional $5,000 with tax refunds.
However, there are some caveats to watch out for. First, bonds cannot be redeemed in the first 12 months after purchase. Additionally, if I-bonds are cashed before five years, an investor loses the last three months of interest payments. Finally, if inflation falls the rate paid will fall.
Peer-to-peer lending
Investors willing to venture outside of the typical top short-term investments can consider higher-risk options such as peer-to-peer, or P2P, lending platforms. These services connect retail investors willing to borrow money with other individuals or small businesses.
By lending money on a P2P lending platform, an investor receives periodic interest payments on their loan, which are usually higher than in traditional short-term investments. However, the risk of default is also high, so there is no free lunch.
“Investing in P2P lending helps diversify your investment portfolio, as it includes a different asset class than stocks or bonds,” says Levon Galstan, a certified public accountant at Oak View Law Group. “P2P lending also offers flexibility, as you can choose which loans to invest in and how much to invest.”