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11 Best Short-Term Investments

The Street illustration

If you’re not exactly angling to play the stock market long term but still want to invest that extra cash you have, what are your options?

Lucky for you, there are plenty of good short-term investment options that can earn you decent returns. What are some of the best short term investments?

Still, first things first – what is a short-term investment, and how is it different from a regular or long-term investment?

What Is a Short-Term Investment?

A short-term investment, sometimes called a temporary investment or marketable security, is an investment that will yield its returns typically in less than five years (or in some cases within a year).

While some define short-term investments as those that cash out within three years (or sometimes even one year), the time span is typically around five years. With a shorter investment period, your goals will be different – for example, short-term investors may use the strategy to take advantage of rising interest rates over a short period. However, there are lots of options when it comes to a strategy with short-term investing.

If you’ve got a shorter time frame (between one and five years), you likely won’t invest in a stock mutual fund or stock because you risk that a steady decline in prices (or a bear market) could wipe out any gains you might have been able to create.

Best Short-Term Investments

So, what are your options for short-term investing, and what are the best short-term investments to maximize profits and minimize risk?

1. Certificates of Deposit (CDs)

A Certificate of Deposit (or CD) is a great investment option for a short-term strategy.

Offered by banks, CDs are deposits that banks pay a higher interest rate because they are locked in for a longer period of time. CDs typically allow depositors to invest their cash in investments between three and five years, although some are even less (starting at one month) or can go up to 10 years. If you’ve got limited time, three years is a solid option, but remember – the longer the investment, the higher the yield, so you may want to opt for a five-year option. And while you may be able to receive monthly interest payments if you like, many investors choose to wait until their CDs have matured and cash in on the amassed interest at the end. And, as a plus, the FDIC will back your deposit up to $250,000 per person.

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However, as a disclaimer, most CDs will penalize you for withdrawing your funds before maturity (usually in an amount equal to about three months of interest or so, but the fee varies depending on the bank), so you should really let your CD be until it matures if you want the full benefits of the investment.

The average returns for CDs range from around 0.5% to over 3%.

As of October 2020, American Express (AXP) – Get Report has one of the better CD interest rates at 2.15% per year (APY) on their five-year CDs, although Goldman Sachs (GS) – Get Report has comparable rates with a five-year CD at 2.45% APY for their online bank.

2. Treasury Securities

As a refresher, treasury securities are bonds issued by the U.S. Treasury and backed by the government’s credit – and the range of treasury products is pretty extensive.

While you can invest in a variety of treasuries including treasury notes, treasury bills, floating-rate notes (FRNs) and more, a popular option for short term investments are treasury inflation-protected securities (TIPS).

TIPS are marketable securities indexed to inflation whose underlying value is based on the consumer price index (CPI). So, the underlying value rises with inflation. However, once the TIPS matures, you will get either the adjusted amount or the original investment – whichever is larger, so deflation won’t hurt your investment.

Typically, TIPS has a return of between 0.5% and 2.5% (if you hold on to it for five years) semiannually. The idea behind the TIPS is that your end investment will be worth the amount of your original investment plus the interest you’ve accrued. And, your investment is protected from changes in inflation.

While you can invest in TIPS directly through the government (at TreasuryDirect.gov), most investors opt to invest in TIPS exchange-traded funds (ETFs) or mutual funds to avoid the interest being taxed – although you will need to open a brokerage account.

Additionally, treasury securities like bonds come at pretty much no risk, and their rates can range from 1.9% to 2.4%.

3. Rewards Checking Accounts

If it was 2008, you’d be getting pretty great APYs on rewards checking accounts (even upwards of 10% for some banks). But even though they’ve declined a bit in popularity in recent years, rewards checking accounts are still a good way to earn a bit in a short-term capacity.

To make the most of your rewards checking account, you will need to use your cash-back credit card to reap the full benefits (so using your debit card 10 to 15 times a month might make you miss out on your rewards).

Discover (DFS) – Get Report has one of the better rewards checking accounts with a 1% cashback on qualifying purchases.

4. Bond Funds

If you’ve got a shorter timeline (around two years or so), bond funds could be a great option.

Managed by professional financial advisers, bond funds are often a higher yield (although sometimes riskier) investment than money markets. So, if you’re looking for a high-yield short term investment, bonds may just be the right fit.

With bond funds, you can get the benefits of portfolio managers and yields that range upward of over 3%. Still, make sure to pick a bond fund with low fees.

As of 2020, some of the better funds include Vanguard (VFSTX) – Get Report , which has a fund with a minimum of $3,000, an expense ratio of about 0.20% and a current yield of about 3.12%. Additionally, iShares Barclays Treasury bond fund (SHY) – Get Report for one to three years has a current yield of around 2.5%.

Unfortunately due to the nature of the market, your investment is not guaranteed. Still, there are no penalties for withdrawing your money early (which could be a huge plus for some investors).

5. Municipal Bonds

Municipal bonds are a bit riskier than TIPS or other kinds of bonds, but there’s pretty high yield potential.

Municipal bonds are issued by local, state or government agencies (not the federal government.) As a plus, municipal bonds are often exempt from interest tax.

There is potential to get a pretty high return (upward of 4%) on municipal bonds, but the major downside is that if the interest rates rise, the value of the municipal bond goes down – sometimes called the “interest rate risk.”

Still, if you hold on to your bond until its maturity, you can get your whole investment plus the interest back.

You can get in on municipal bonds through brokerage accounts like TD Ameritrade (AMTD) – Get Report .

6. Peer-to-Peer Lending

Done through online lenders like Lending Club (LC) – Get Report or Prosper, peer-to-peer lending essentially connects borrowers with lenders.

Almost like getting a credit card, borrowers are rated by their creditworthiness, which can help minimize risk when lending to someone with a higher degree of creditworthiness.

While the interest will vary depending on the borrower’s creditworthiness (for Lending Club, those who rank as “A” are 4.89%, while Prosper rates “AA” with estimated returns of 4.15%), they typically range upwards of 4%.

For most, terms are about three years and typically require a minimum of $25.

7. Money Market Accounts

These FDIC-backed accounts allow investors to invest their money, earn a higher interest rate than a savings account, and protect their money in the meantime.

However, money market mutual funds are not FDIC-insured, so it is important to note the difference. Money market accounts act in a similar fashion to regular accounts in that you can often write checks or use a debit card for your account (although you may be limited in how many times you can use it).

Still, most money market accounts require a minimum deposit, so be sure do to your research if you have limited funds to work with.

Sallie Mae Bank Money Market Account (SLM) – Get Report rate is about 1.85% APY for reference, as of October 2020.

8. Roth IRA

While perhaps not a traditional investment vehicle, Roth IRAs are actually similar to many of the other short-term investment strategies in that you can withdraw funds at any point without penalty.

Because the Roth IRA is post-tax (meaning your contributions are taxed before they’re invested), you can withdraw them without having to pay taxes or penalties.

Additionally, Roth IRAs can be good short-term investment options because you can often invest in higher return options like ETFs and mutual funds.

9. Paying Off High-Interest Debt

This is a great option for a quick, high return on investment (read: double-digit returns).

Paying off high-interest debt like credit cards is a smart choice because you can get a great return while improving your financial situation – and, guarantees a return. For example, paying off a credit card with a 15% interest rate on $10,000 is a great option to essentially get 15% on $10,000 – and can even allow you to carry your high-interest balance onto a 0% APR balance transfer card like Chase Slate (JPM) – Get Report or Discover it.

In general, paying off high-interest debt will get you great returns, so it’s definitely worth looking into.

10. Online Savings Accounts

Albeit a bit of a more conservative option, online savings accounts can still get you a better interest rate than many traditional banks. If you opt for a high-interest savings account, you can typically get rates of between 1% to 2% per year. Additionally, the FDIC backs $250,000 per person, making it a safer option.

Because there are no limits on withdrawals, liquidity is higher for online savings accounts and maybe a draw for investors.

Discover and Ally (ALLY) – Get Report has good rates (at around 2%).

11. Promotional Deals

Despite being a somewhat unorthodox short term investment strategy, taking advantage of promotional and cashback deals can help you earn money fast.

However, this twist is that you can only get earnings when you spend money (as opposed to getting returns on investing money).

For example, the Capital One Venture card (COF) – Get Report offers 50,000 travel miles when you spend $3,000 in the first three months – translating to about $500. Additionally, other cards like Chase Sapphire Preferred card let you earn 50,000 points ($500) when you spend $4,000 in the first three months (plus, the $95 annual fee is waived for the first year) – so spending money on things you normally buy can actually give you money back.

Why Make Short-Term Investments?

Because of their time frame, short term investments are often seen as safer than long term investments, especially on the stock market. While long-term investment positions (especially on the stock market) are subject to market fluctuations, bull and bear markets (which may erase gains or yields) and other risks, short-term investments are often thought to be safer and can still produce decent profits for the investor.

Of course, short-term volatility is always possible, and short-term investments – like with any investments – should be seen as inherently risky endeavors that have their positives and negatives as any other investment would.

The Bottom Line

Just because you have a limited time frame in which you’d like to invest doesn’t mean you can’t get decent returns. Be creative and research your options for unique ways to earn money in the short term.

The True Risks Behind Preferred Stock ETFs

Investors in search of steady income from their portfolios often select preferred stocks, which combine the features of stocks and bonds, rather than Treasury securities, corporate bonds, or exchange traded funds that hold bonds. Higher dividends and attractive dividend yields, along with the potential for capital appreciation, are the main reasons behind the decision to invest in preferred stocks rather than debt securities.

Another advantage of owning preferred shares rather than bonds is that their dividends are taxed as long-term capital gains rather than income, while the interest from Treasuries and corporate bonds are subject to ordinary income tax rates (which are typically lower than longer-term capital gains rates for many taxpayers). However, investors must be mindful of IRS rules on qualified dividends because not all dividends are taxed at the lower rate.

Key Takeaways

  • Although preferred stock ETFs offer some benefits, there are also risks to consider before investing.
  • Share prices of preferred stocks often fall when interest rates move higher because of increased competition from interest-bearing securities that are deemed safer, like Treasury bonds.
  • Call risk is also a consideration with some preferred stocks because companies can redeem shares when needed.
  • PFF and FPE are examples of exchange traded funds that hold shares of preferred stock.
  • Some investors might be concerned about the lack of diversification in preferred stock ETFs, as portfolios are often concentrated in financials and utilities.

Although preferred stocks can offer some benefits, these investments also have risks. We review those risks here and also take a look at two popular preferred stock ETFs: the iShares U.S. Preferred Stock ETF (PFF) and the First Trust Preferred Securities and Income ETF (FPE).

General Risks

A big risk of owning preferred stocks is that shares are often sensitive to changes in interest rates. Because preferred stocks often pay dividends at average fixed rates in the 5% to 6% range, share prices typically fall as prevailing interest rates increase. For example, if Treasury bond yields increase and approach a preferred stock’s dividend yield, demand for shares will likely decline, sending its share price lower. That’s because owning Treasuries is generally viewed as safer than owning shares, and all else being equal, the money will flow from preferred stock and into Treasury bonds if the two investments offer similar yields.

Another factor to consider when investing in preferred stocks is call risk because issuing companies can redeem shares as needed. This can happen with callable preferred stock when interest rates fall—the issuing company may then redeem those shares for a price specified in the prospectus and issue new shares with lower dividend yields.

Like with common stock, preferred stocks also have liquidation risks. If a company is bankrupt and must be liquidated, for example, it must pay all of its creditors first, and then bondholders, before preferred stockholders claim any assets.

Particular Risks

Preferred stocks are rated by the same credit agencies that rate bonds. The top three rating agencies are Moody’s, Standard & Poor’s, and Fitch Ratings. While preferred stocks can earn an investment-grade rating, many have ratings below BBB and are considered speculative or junk.

Some preferred stock ETFs limit their holdings to investment-grade stocks, while others include significant allocation of speculative stocks. The cautious investor must become familiar with the particular investment strategy and portfolio holdings of the ETF. Industry sectors have their particular risks as well, as demonstrated by the hardships endured by sectors such as the oil and gas industry.

iShares U.S. Preferred Stock ETF

Listed under the ticker symbol PFF, iShares U.S. Preferred Stock and Income Securities ETF is the largest preferred stock exchange traded funds, with total assets of $16.80 billion. The fund’s trailing 12-month dividend yield is 5.50%, and it has an expense ratio of 0.46%.

This ETF tracks the performance of the S&P U.S. Preferred Stock Index. Only 5% of its 501 portfolio holdings are outside of the United States and the ETF is heavily skewed toward the financial sector, with banking sector securities comprising 27.50% of its weight, diversified financial securities comprising 18.9%, and the insurance sector accounting for 10.30% of the portfolio weight. Utilities account for 14.1% of the portfolio.

The concentration in financials and utilities and subsequent lack of diversification of some preferred stock ETFs, like PFF, could alienate a significant number of risk-averse investors beyond those who fear another financial crisis.

First Trust Preferred Securities and Income ETF

Of the major preferred stock ETFs, the First Trust Preferred Securities and Income ETF is one of the largest, with 260 holdings, total net assets of $5.4 billion, and ticker symbol FPE. The fund has a trailing 12-month dividend yield of 5.35%. The fund is an actively managed ETF with an expense ratio of 0.85%.

Only 24% of ETF’s holdings are investment grade (BBB or higher). Speculative-grade investments, with ratings from BBB- through B-, account for 69.8% of the fund’s holdings, and 4.4% were unrated.

Risk-averse investors might also be concerned about this fund’s lack of diversification, as it has a heavy allocation toward the financial sector. Banks accounted for 40.1% of the fund’s portfolio weight, followed by insurance securities at 12%, and capital markets at 11.1%. There is an additional 11% of the fund’s assets invested utilities and 5.7% in the oil and gas sector.

8 High-Risk Investments That Could Double Your Money

When an investment vehicle offers a high rate of return in a short period of time, investors know this means the investment is risky.

Given enough time, many investments have the potential to double the initial principal amount, but many investors are instead attracted to the lure of high yields in short periods of time despite the possibility of unattractive losses.

Make no mistake, there is no guaranteed way to double your money with any investment. But there are plenty of examples of investments that doubled or more in a short period of time. For every one of these, there are hundreds that have failed, so the onus is on the buyer to beware.

Key Takeaways

  • Finding an investment that enables you to double your money is almost impossible and would certainly involve taking on risks.
  • However, there are some investments that might not double your money, but do offer the potential for big returns; while they provide risk, the risk is manageable, as they are based on fundamentals, strategy or technical research.
  • They include the Rule of 72, options investing, initial public offerings (IPOs), venture capital, foreign emerging markets, REITs, high-yield bonds and currencies.

The Rule of 72

This is definitely not a short term strategy, but it is tried and true. The Rule of 72 is a simple way to determine how long an investment will take to double given a fixed annual rate of interest. By dividing 72 by the annual rate of return, investors obtain a rough estimate of how many years it will take for the initial investment to duplicate itself.

For example, the Rule of 72 states that $1 invested at an annual fixed interest rate of 10% would take 7.2 years ((72/10) = 7.2) to grow to $2. In reality, a 10% investment will take 7.3 years to double ((1.10^7.3 = 2). If you have the time, the magic of compound interest and the Rule of 72 is the surest way to double your money.

Investing in Options

Options offer high rewards for investors trying to time the market. An investor who purchases options may purchase a stock or commodity equity at a specified price within a future date range. If the price of a security turns out to be not as desirable during the future dates as the investor originally predicted, the investor does not have to purchase or sell the option security.

This form of investment is especially risky because it places time requirements on the purchase or sale of securities. Professional investors often discourage the practice of timing the market and this is why options can be dangerous or rewarding. If you want to learn more about how options work, read our tutorial or sign up for our Options for Beginners course on the Investopedia Academy.

Initial Public Offerings

Some initial public offerings (IPOs), such as Snapchat’s in mid-2020, attract a lot of attention that can skew valuations and the judgments professionals offer on short-term returns.   Other IPOs are less high-profile and can offer investors a chance to purchase shares while a company is severely undervalued, leading to high short- and long-term returns once a correction in the valuation of the company occurs. Most IPOs fail to generate significant returns, or any returns at all, such as the case with SNAP. On the other hand, Twilio Inc. (TWLO), a cloud communications company that went public in June of 2020, raised $150 million at an IPO offer price of $15 a share.   In its third day of trading, Twilio was up 90 percent and by mid-December was up 101 percent. 

IPOs are risky because despite the efforts make by the company to disclose information to the public to obtain the green light on the IPO by the SEC, there is still a high degree of uncertainty as to whether a company’s management will perform the necessary duties to propel the company forward.

Venture Capital

The future of startups seeking investment from venture capitalists is particularly unstable and uncertain. Many startups fail, but a few gems are able to offer high-demand products and services that the public wants and needs. Even if a startup’s product is desirable, poor management, poor marketing efforts, and even a bad location can deter the success of a new company.

Part of the risk of venture capital is the low transparency in management’s perceived ability to carry out the necessary functions to support the business. Many startups are fueled by great ideas by people who are not business-minded. Venture capital investors need to do additional research to securely assess the viability of a brand new company. Venture capital investments usually have very high minimums, which can be a challenge for some investors. If you are considering putting your money into a venture capital fund or investment, make sure to do your due diligence.

Foreign Emerging Markets

A country experiencing a growing economy can be an ideal investment opportunity. Investors can buy government bonds, stocks or sectors with that country experiencing hyper-growth or ETFs that represent a growing sector of stocks. Such was the case with China from 2020.   Spurts in economic growth in countries are rare events that, though risky, can provide investors a slew of brand new companies to invest in to bolster personal portfolios.

The greatest risk of emerging markets is that the period of extreme growth may last for a shorter amount of time than investors estimate, leading to discouraging performance. The political environment in countries experiencing economic booms can change suddenly and modify the economy that previously supported growth and innovation.

REITs

Real estate investment trusts (REITs) offer investors high dividends in exchange for tax breaks from the government.   The trusts invest in pools of commercial or residential real estate.

Due to the underlying interest in real estate ventures, REITs are prone to swings based on developments in an overall economy, levels of interest rates and the current state of the real estate market, which is known to flourish or experience depression. The highly fluctuating nature of the real estate market causes REITs to be risky investments.

Although the potential dividends from REITs can be high, there is also pronounced risk on the initial principal investment. REITs that offer the highest dividends of 10% to 15% are also at times the riskiest.

While these investment choices can provide lucrative returns, they are marred by different types of risks. While risk may be relative, these investments require a combination of experience, risk management, and education.

High Yield Bonds

Whether issued by a foreign government or high-debt company, high yield bonds can offer investors outrageous returns in exchange for the potential loss of principal. These instruments can be particularly attractive when compared to the current bonds offered by a government in a low-interest-rate environment.

Investors should be aware that a high yield bond offering 15 to 20% may be junk and the initial consideration that multiple instances of reinvestment will double a principal should be tested against the potential for a total loss of investment dollars. However, not all high yield bonds fail, and this is why these bonds can potentially be lucrative.

Currency Trading

Currency trading and investing may be best left to the professionals, as quick-paced changes in exchange rates offer a high-risk environment to sentimental traders and investors.

Those investors who can handle the added pressures of currency trading should seek out the patterns of specific currencies before investing to curtail added risks. Currency markets are linked to one another and it is a common practice to short one currency while going long on another to protect investments from additional losses. Currency, or forex trading, as it is called, is not for beginners. If you want to learn more, check out our tutorial or take our Forex for Beginners course on the Investopedia Academy.

Trading on the forex market does not have the same margin requirements as the traditional stock market, which can be additionally risky for investors looking to further enhance gains.

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