What is a short-term investment?
If you're making a short-term investment, you're often doing so because you need to have the money at a certain time. If you're saving for a down payment on a house or a wedding, for example, the money must be at the ready. Short-term investments are those you make for less than three years.
If you have a longer time horizon – at least three to five years (and even longer is better) – you can look at investments such as stocks. Stocks offer the potential for much higher returns. The stock market has historically risen an average of 10 percent annually over long periods – but it has proven to be quite volatile. So the longer time horizon gives you the ability to ride out the ups and downs of the stock market.
Short-term investments: Safe but lower yield
The safety of short-term investments comes at a cost. You likely won't be able to earn as much in a short-term investment as you would in a long-term investment. If you invest for the short term, you'll be limited to certain types of investments and shouldn't buy riskier assets such as stocks and stock funds. (But if you can invest for the long term, here's how to buy stocks.)
Short-term investments do have a couple of advantages, however. They're often highly liquid, so you can get your money whenever you need it. Also, they tend to be lower risk than long-term investments, so you may have limited downside or even none at all.
Best short-term investments in March:
- High-yield savings accounts
- Short-term corporate bond funds
- Money market accounts
- Cash management accounts
- Short-term U.S. government bond funds
Overview: Top short-term investments in March 2022
Here are a few of the best short-term investments to consider that still offer you some return.
1. High-yield savings accounts
A high-yield savings account at a bank or credit union is a good alternative to holding cash in a checking account, which typically pays very little interest on your deposit. The bank will pay interest in a savings account on a regular basis.
Savers would do well to comparison-shop high-yield savings accounts, because it's easy to find which banks offer the highest interest rates and they are easy to set up.
Risk: Savings accounts are insured by the Federal Deposit Insurance Corporation (FDIC) at banks and by the National Credit Union Administration (NCUA) at credit unions, so you won't lose money. There's not really a risk to these accounts in the short term, though investors who hold their money over longer periods may have trouble keeping up with inflation.
Liquidity: Savings accounts are highly liquid, and you can add money to the account. Savings accounts typically only allow for up to six fee-free withdrawals or transfers per statement cycle, however. (The Federal Reserve now allows banks to waive this requirement.) Of course, you'll want to watch out for banks that charge fees for maintaining the account or accessing ATMs, so you can minimize those.
2. Short-term corporate bond funds
Corporate bonds are bonds issued by major corporations to fund their investments. They are typically considered safe and pay interest at regular intervals, perhaps quarterly or twice a year.
Bond funds are collections of these corporate bonds from many different companies, usually across many industries and company sizes. This diversification means that a poorly-performing bond won't hurt the overall return very much. The bond fund will pay interest on a regular basis, typically monthly.
Risk: A short-term corporate bond fund is not insured by the government, so it can lose money. However, bonds tend to be quite safe, especially if you're buying a broadly diversified collection of them. In addition, a short-term fund provides the least amount of risk exposure to changing interest rates, so rising or falling rates won't affect the price of the fund too much.
Liquidity: A short-term corporate bond fund is highly liquid, and it can be bought and sold on any day that the financial markets are open.
3. Money market accounts
Money market accounts are another kind of bank deposit, and they usually pay a higher interest rate than regular savings accounts, though they typically require a higher minimum investment, too.
Risk: Be sure to find a money market account that is FDIC-insured so that your account will be protected from losing money, with coverage up to $250,000 per depositor, per bank.
Like a savings account, the major risk for money market accounts occurs over time, because their low interest rates usually make it difficult for investors to keep up with inflation. In the short term, however, that's not a significant concern.
Liquidity: Money market accounts are highly liquid, though federal laws do impose some restrictions on withdrawals.
4. Cash management accounts
A cash management account allows you to put money in a variety of short-term investments, and it acts much like an omnibus account. You can often invest, write checks off the account, transfer money and do other typical bank-like activities. Cash management accounts are typically offered by robo-advisors and online stock brokers.
So the cash management account gives you a lot of flexibility.
Risk: Cash management accounts are often invested in safe low-yield money market funds, so there's not a lot of risk. In the case of some robo-advisor accounts, these institutions deposit your money into FDIC-protected partner banks, so you might want to make sure that you don't exceed FDIC deposit coverage if you already do business with one of the partner banks.
Liquidity: Cash management accounts are extremely liquid, and money can be withdrawn at any time. In this respect, they may be even better than traditional savings and money market accounts, which limit monthly withdrawals.
5. Short-term U.S. government bond funds
Government bonds are like corporate bonds except that they're issued by the U.S. federal government and its agencies. Government bond funds purchase investments such as T-bills, T-bonds, T-notes and mortgage-backed securities from federal agencies such as the Government National Mortgage Association (Ginnie Mae). These bonds are considered low-risk.
Risk: While bonds issued by the federal government and its agencies are not backed by the FDIC, the bonds are the government's promises to repay money. Because they're backed by the full faith and credit of the United States, these bonds are considered very safe.
In addition, a fund of short-term bonds means an investor takes on a low amount of interest rate risk. So rising or falling rates won't affect the price of the fund's bonds very much.
Liquidity: Government bonds are among the most widely traded assets on the exchanges, so government bond funds are highly liquid. They can be bought and sold on any day that the stock market is open.
6. Corporate bonds
Companies also issue bonds, which can come in relatively low-risk varieties (issued by large profitable companies) down to very risky ones. The lowest of the low are known as high-yield bonds or “junk bonds.”
“There are high-yield corporate bonds that are low rate, low quality,” says Cheryl Krueger, founder of Growing Fortunes Financial Partners in Schaumburg, Illinois. “I consider those more risky because you have not just the interest rate risk, but the default risk as well.”
- Interest-rate risk: The market value of a bond can fluctuate as interest rates change. Bond values move up when rates fall and bond values move down when rates rise.
- Default risk: The company could fail to make good on its promise to make the interest and principal payments, potentially leaving you with nothing on the investment.
Why invest: To mitigate interest-rate risk, investors can select bonds that mature in the next few years. Longer-term bonds are more sensitive to changes in interest rates. To lower default risk, investors can select high-quality bonds from reputable large companies, or buy funds that invest in a diversified portfolio of these bonds.
Risk: Bonds are generally thought to be lower risk than stocks, though neither asset class is risk-free.
“Bondholders are higher in the pecking order than stockholders, so if the company goes bankrupt, bondholders get their money back before stockholders,” Wacek says.
7. Dividend-paying stocks
Stocks aren't as safe as cash, savings accounts or government debt, but they're generally less risky than high-fliers like options or futures. Dividend stocks are considered safer than high-growth stocks, because they pay cash dividends, helping to limit their volatility but not eliminating it. So dividend stocks will fluctuate with the market but may not fall as far when the market is depressed.
Why invest: Stocks that pay dividends are generally perceived as less risky than those that don't.
“I wouldn't say a dividend-paying stock is a low-risk investment because there were dividend-paying stocks that lost 20 percent or 30 percent in 2008,” Wacek says. “But in general, it's lower risk than a growth stock.”
That's because dividend-paying companies tend to be more stable and mature, and they offer the dividend, as well as the possibility of stock-price appreciation.
“You're not depending on only the value of that stock, which can fluctuate, but you're getting paid a regular income from that stock, too,” Wacek says.
Risk: One risk for dividend stocks is if the company runs into tough times and declares a loss, forcing it to trim or eliminate its dividend entirely, which will hurt the stock price.
8. Preferred stocks
Preferred stocks are more like lower-grade bonds than common stocks. Still, their values may fluctuate substantially if the market falls or if interest rates rise.
Why invest: Like a bond, preferred stock makes a regular cash payout. But, unusually, companies that issue preferred stock may be able to suspend the dividend in some circumstances, though often the company has to make up any missed payments. And the company has to pay dividends on preferred stock before dividends can be paid to common stockholders.
Risk: Preferred stock is like a riskier version of a bond, but is generally safer than a stock. They are often referred to as hybrid securities because holders of preferred stock get paid out after bondholders but before stockholders. Preferred stocks typically trade on a stock exchange like other stocks and need to be analyzed carefully before purchasing.
9. Money market accounts
A money market account may feel much like a savings account, and it offers many of the same benefits, including a debit card and interest payments. A money market account may require a higher minimum deposit than a savings account, however.
Why invest: Rates on money market accounts may be higher than comparable savings accounts. Plus you'll have the flexibility to spend the cash if you need it, though the money market account may have a limit on your monthly withdrawals, similar to a savings account. You'll want to search for the best rates here to make sure you're maximizing your returns.
Risk: Money market accounts are protected by the FDIC, with guarantees up to $250,000 per depositor per bank. So money market accounts present no risk to your principal. Perhaps the biggest risk is the cost of having too much money in your account and not earning enough interest to outpace inflation, meaning you could lose purchasing power over time.
10. Fixed annuities
An annuity is a contract, often made with an insurance company, that will pay a certain level of income over some time period in exchange for an upfront payment. The annuity can be structured many ways, such as to pay over a fixed period such as 20 years or until the death of the client.
With a fixed annuity, the contract promises to pay a specific sum of money, usually monthly, over a period of time. You can contribute a lump sum and take your payout starting immediately, or pay into it over time and have the annuity begin paying out at some future date (such as your retirement date.)
Why invest: A fixed annuity can provide you with a guaranteed income and return, giving you greater financial security, especially during periods when you are no longer working. An annuity can also offer you a way to grow your income on a tax-deferred basis, and you can contribute an unlimited amount to the account. Annuities may also come with a range of other benefits, such as death benefits or minimum guaranteed payouts, depending on the contract.
Risk: Annuity contracts are notoriously complex, and so you may not be getting exactly what you expect if you don't read the contract's fine print very closely. Annuities are fairly illiquid, meaning it can be hard or impossible to get out of one without incurring a significant penalty. If inflation rises substantially in the future, your guaranteed payout may not look as attractive either.