4 reliable short-term investments
You've probably heard of Bitcoin, GameStop, and Moderna. Between a meme-stock frenzy, a push for COVID-19 vaccines, and growing uncertainty about traditional (fiat) money, these stocks and investment avenues shot up in popularity in 2021 and became some of the trendiest and most profitable stocks of the past year. For some, taking a risk on highly volatile (read: riskier) stocks was a worthy endeavor. Given the stock market's positive performance, hopping on speculative trades and investments wasn't as brazen as some might have thought at the start of 2020. However, if stock market volatility or up-and-down markets make your stomach churn, you have other options.
While no investment is 100% guaranteed to succeed, there are ways to attain stability, liquidity, and low transaction costs. Why are those three things important?
- Stability: The opposite of volatility. As the name implies, it means there's a strong track record of the investment being low-risk and robust.
- Liquidity: How quickly could you turn your asset into cash if you needed it? If you can confidently sell your investment without it affecting the market price, you have liquidity. If you're wanting short-term investments, you want to make sure your money isn't tied up or inaccessible for decades.
- Low Transaction Costs: Being bogged down by high transaction and brokerage fees can often dissuade someone from committing to an investment. For instance, there are often fees a broker will charge to complete a transaction. However, the short-term investments we'll look at today have little to no transaction costs, allowing you to maximize the most of your money.
The takeaway today is: investing doesn't have to be scary, and you don't always have to wait years and years to see some kind of return. There are plenty of short-term investments out there that have been used for decades and continue to be reliable ventures.
For the purposes of this article, we'll define reliable to mean low-risk, secure investments. In other words, investments where it's extremely unlikely that you'll lose money due to various protections (e.g. government or bank insurance). And by short-term, we mean anything set to give you a return within 5 years. Technically speaking, a short-term investment is anything that gives you a return in a year or less, but we've expanded the definition to 5 years of less to broaden the scope of potential options.
Using data, metrics, and professional opinions, we can make informed decisions as to what are the best fits for our individual portfolios.
Remember that while investing takes risk, it's not the same as gambling. There are expert-driven metrics we can study to ensure we're planting our money both strategically and wisely.
Here are four reliable short-term investments you can consider as potential options.
Investment 1: Certificates of Deposit (CDs)
Most of us haven't heard the word CD since 2010, but there's another kind of CD that continues to be a staple of the investment world.
A Certificate of Deposit (CD), can be acquired at a bank or credit union and involves depositing a certain amount of money that cannot be accessed or touched for a prescribed amount of time. It's a similar concept to a savings account, as you passively leave money untouched and in the hands of a banking institution.
Unlike a savings account, which historically has low rates of return (the current national average is 0.06%), a CD can produce much greater returns because you get a locked-in interest rate from the beginning. The trade off, as stated before, is that you cannot access this money for a certain amount of time. If you really need that money, you'll be hit with an early withdrawal penalty, which compromises the potency of the investment. Certificate of Deposit term agreements range from 3-6 months to 7 years, depending on what your goals are.
The downside? If you lock-in a rate that seems solid and launch into a long-term agreement, you may miss out on a CD with a better rate that becomes available down the line. Granted, the disparity between CD rates is often pretty small.
If you have a lump sum of cash that you don't actively need at the moment but could foresee yourself needing in the future, let it grow in a CD. It should be noted that CDs don't offer massively higher interest rates than a typical savings account, but they're often more than the aforementioned 0.06% – especially if you agree to a longer term.
For instance, a 72 month (or 6 year) CD with First National Bank of America has a historical APY (annual percentage yield) of 1.3%, and only requires a minimum deposit of $1,000. Let's see how that stacks up against a traditional savings account, using an initial deposit of $10,000 as an example.
- $10,000 invested in a savings account (without contributions) for 6 years at a rate of 0.06% APY growth would grow your account by $36.
- $10,000 invested in a CD for 6 years at a rate of 1.3% would grow your account by $805.79
As you can see, the higher the initial contribution, the higher the potential return. But the difference here of $769 shows that one could obtain a return 20 times greater provided you don't need to access that money for a good amount of time. And if you're putting money in a savings account, that was probably your goal to begin with anyway.
If you're interested in opening a CD, make sure to scour the internet or contact some local banks across the nation to see what they'll offer you. You don't have to open up a CD at the same bank or credit union where you have your primary checking account. Doing some research can help you find a more competitive rate. And be on the lookout – the rates change every few months in accordance with the Federal Reserve's direction. Here is a snapshot of competitive rates at any given moment.
Bottom Line: CDs won't give you whopping, jaw-dropping returns, but they will give you way more than you could get from a typical savings account. If you're planning on not touching it for a few years or if you're looking for another way to diversify, you'll be pleasantly surprised with a CD. Moreover, they're extremely safe as they're protected within FDIC guidelines and guaranteed in interest rate for the CD's duration. For the relatively conservative, low-risk investor, this is a savvy move.
Investment #2: Short Term Bonds
Similar to CDs, bonds have a fixed rate of return over a certain period of time or term length. With bonds, you loan out your money to a government, institution, or company. And just like a regular loan, you eventually get your money back after the loan term ends and receive yearly interest income along the way.
The initial investment is called the principal. The length of time you loan out the money is called the maturity date. And the yearly percentage paid out to you is called the coupon rate. Let's say you had a five year maturity date and loaned $5,000 to the government. The current annual coupon rate for a government bond is 1.76%, so your annual payout would be $88. After five years, you'd have gained nearly $500 on a "leave it and forget it," short-term investment.
Just like stocks and ETFs, there are many different types of bonds.
Some of the most popular include municipal bonds, corporate bonds, and series-I savings Bonds. Of that list, municipal (or "muni") bonds and corporate bonds are often used as short-term investment bonds, i.e. a term of one to four years. Here's the brief scoop on each:
- Municipal (Muni) Bonds: These types of bonds are often issued by local and state governments as a means of financing public works projects like roads, schools, and parks. Typical investment amounts range from $5,000-$10,000 and have the perk of being exempt from many city and state taxes on interest.
- Corporate Bonds: Described by some as "the last safe short-term investment," corporate bonds are utilized by companies to raise capital. And unlike treasury savings or municipal bonds, these are linked to private and public companies (or non-government entities). One of the biggest upsides is that they often have higher rates of return than government-related bonds.
- Series-I Savings Bonds: These bonds, also known simply as I-Bonds, are specifically linked to the U.S. Government and relatively low-risk opportunities. Per the U.S. Treasury: "during their lifetime they earn interest and are protected from inflation." The goal itself is to protect your money from losing value due to inflation. Moreover, you don't have to be rolling in cash to purchase one, as the minimum deposit amount is $25. Though most carry a 30 year term, they can be cashed after a year with minimal penalty.
Bottom Line: Bonds, like CDs, are reliable safety nets and can be put in the low-risk category. One of the perks they provide is a consistent income from the interest returns obtained each year, as opposed to having to wait years to reap the rewards with the initial investment paid back at the end of the CD’s term.
Investment #3: Money Market Accounts
Money Market Accounts (MMAs) are savings accounts with higher return potential (typically an APY of 0.5-1.5%, per NerdWallet). If you don't have wiggle room in your bank account or aren't a high roller when it comes to investing, MMAs are a good way to venture into investing.
Let's say you're a recent college grad working two jobs and don't have the risk tolerance to go big on a speculative investment. Maybe you take that extra $5,000 yearly bonus or money you made in tips and throw it in MMA for a year. If you find a bank that offers an interest rate of 1.5%, you'd net $75. That's not an eye popping amount, but it requires no effort other than setting up the account in the first place.
Safety-wise, you can't get much more bulletproof. Your money is subject to FDIC guidelines, you can cash your money easily at any time, and there typically aren't any fees.
There's an old adage that a journey of a thousand miles begins with a single step. Don't discount that modest amount you accrue from a Money Market Account. Not only can they help build your confidence as an investor, but also the money you earn year over year adds up over time. And like with anything, you have a cushion to reallocate those gains towards other short-term investments.
Here are a few expert-recommended Money Market Accounts you could consider, per Business Insider. Of that list, the Premier Members Credit Union stands out for its generous 2% APY on investments as low as $5-$2,000. Their rates actually go down the more money you add, so it's an appealing option for short-term investments.
If you gave $2,000 at that 2% APY rate, you'd earn $40 a year. After 10 years, that's $400 you didn't have before.
Bottom Line: It's easy to swing for the fences and disregard the seemingly "little" gains. But the reality is that safety and modest gains go hand in hand. There are ways to minimize your risk when it comes to more speculative, volatile investments, and this is one of them. Having something like a Money Market Account diversifies your portfolio and gives a nice safety net and cushion that might empower you to make bold choices in other areas. Or perhaps you're content with just making a little money on the side and getting some practice investing. In either way, think of a Money Market account like your classic savings account with more returns and added perks.
Investment #4: Generosity / Giving / Philanthropy
This one might come as a shock, as philanthropists in our society are stereotypically wealthy individuals looking to give away their money to a good cause or foundation. While that's true in some cases, generosity can be an investment (in several senses of the word) for anybody – regardless of how much they give.
From a purely financial standpoint, giving can provide others with economic empowerment while also offering tax write-off opportunities for the giver. According to Fidelity Investments, this is a practice known as "impact investing." Here's how they describe it:
"This strategy is based on the idea that you can align your investments with your personal and philanthropic values while realizing financial returns. So, for example, if you were interested in reducing the use of fossil fuels, you might invest in funds focused on companies that develop innovative renewable energy solutions."
On one hand, giving could be a means by which you help develop an organization or cause you believe in. A prime example of this is when Overflow collaborated with VIVE Church to help maximize giving towards their new building campaign.
Many donors ended up giving stock or crypto towards the building campaign, both because they believed in the church's mission and they knew they could expand their impact by giving tax-exempt donations (cryptocurrency and stock donations currently are not subject to capital gains tax.)
Whether you're a big time donor or simply a consistent giver, there are a myriad of tax breaks and deductions you can seek while also ensuring that the full value of what you give carries over and truly helps the donation recipient.
However, there's also a deeper value to giving that forms an irreplaceable connection with people that money can't. Ascent, a private loan agency, has done research on the emotional / mental health impacts of giving, and the intrinsic results were powerful. Here were just a few of the benefits they saw:
"On average, generous people reported having slightly more close friends with 3.2 compared to 2.6 for less-generous people."
"High-generosity respondents reported higher rates of satisfaction with their possessions (75% versus 60%), homes (73% versus 56%), and vehicles (72% versus 55%)."
But the broader point is this: even if you never fully "reap the rewards" of giving, or it doesn't come full circle, or no one even knows you gave, that doesn't take away from your generosity.
There's a Proverb in Scripture that says "the world of the generous gets larger and larger." To be clear, it's not saying that the generous are guaranteed happiness. As our founder, Vance Roush puts it: "We don’t give to get something in return, but because when we give, we connect ourselves to something beyond ourselves."
As you consider the above strategies (Bonds, CDs, etc.), remember that metrics can only show you so much. Baseball is actually a perfect example of this. There's a billion advanced metrics that can tell you why you should or shouldn't keep a pitcher in the game. But sometimes managers keep a player in who's on a hot streak because they can see how much they want it.
What does that have to do with investing? It's just a simple reminder that at times we need to step back, get perspective, and let our heart jump in the driver's seat. Investing can be a tiring, taxing process, and giving helps us see outside ourselves and engage life with new perspectives. You may not be able to put a monetary value on that, but it'll make your world grow larger in perspectives, opportunities, and genuine, authentic connections.
Bottom Line: Your CPA or even TurboTax professional can help you with your unique tax situation, and can help you achieve the biggest bang for your buck when it comes to charitable or philanthropic giving by donating stock or cryptocurrencies. That said, you can't go wrong by simply investing in others and witnessing the way that shapes and redefines your relationship with money.