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Usually, when you read anything about investing, the advice generally says one thing: long-term investors are luckier when it comes to higher returns.
So why would you want to implement a short-term strategy?
While long-term strategies are there to help you achieve your long-term goals, short-term ones are there to help you achieve smaller goals in the coming years.
Let’s talk about the investments that make up these different short-term strategies and who they might be best for.
The short version:
- Short-term investment strategies are usually made up of “safer” low-risk investments that you can easily pull from when needed.
- Long-term strategies, on the other hand, rely on higher-yielding investments, such as the stock market.
- You want to consider the return and risk of an investment in addition to liquidity when considering short-term options.
What are short-term investment strategies?
When you need to save money for a future down payment on a house, a wedding, or seed money to start your business, you need different investment options than those created for long-term investors saving for retirement . Short-term investment strategies prioritize the most liquid investments that you can draw from when you need to, while earning a decent return.
Looking for long-term investments? Top long-term investment strategies to use in 2022
How do short-term investment strategies differ from long-term investment strategies?
Your investment objective will determine which strategy you use. The longer-term investment goal is retirement, but people saving for their children’s college tuition or looking to buy a vacation home or rental property should also consider a long-term strategy. On the other hand, goals like buying a car or a house or taking a big vacation would be better served with a short-term strategy.
Aside from purpose and timing, there are some differences between long-term and short-term strategies. They include:
- Risk tolerance
When you need your money in a few years, stick to lower-risk investments that will allow you to access your money quickly and easily, without going through too many highs and lows. Take the time to think about how willing you are to lose your investment completely. This will help you determine your true risk tolerance.
There’s a reason many financial experts recommend investing in stocks and index funds when you have a longer investment horizon. Because the stock market drops and soars suddenly every few years, you need time to balance those gains and losses. This is why stocks are not a liquid option for short-term investors who need their returns in a few years.
- Type of management
Many people have no idea how their retirement account is invested and don’t really feel the need to know. However, while long-term investments can be easily managed by an advisor in person or robo, short-term investments should be watched more closely by you. That’s because you’ll need the money sooner and it’s often in savings vehicles (such as savings accounts) that others can’t handle.
What are the best strategies for short term investments
Let’s get to the meat now. When you save for more pressing goals, what investments do you choose?
Here are just five to consider:
High Yield Savings Accounts (HYSAs)
Of course, a high-yield savings account gives you a pretty low return compared to other types of investments: many accounts offer a little more than 1% APY. But what a HYSA does is give you the most liquid option available. You can withdraw your money whenever you need it and use it for your expenses. While regular savings accounts usually have monthly withdrawal limits, high-yield savings accounts generally offer the most flexibility.
Read more: Best High Yield Savings Accounts for 2022
Certificates of Deposit (CDs)
Certificates of deposit are best for those who don’t need to touch their money for several years. You’ll keep your money for the term you choose (common terms include one, two, five and even 12 years) and earn a fixed interest rate while it’s in the account. It’s an easy way to earn some interest, just by keeping the money in the right place. The average CD interest isn’t surprising: 12-month CDs average 0.46% interest, but that’s still better than a regular savings account.
Money Market Accounts (MMA)
A money market account is like a savings account and a checking account having a baby. Your money will stay in an interest-bearing account, but you’ll get a debit card that lets you spend money as needed. Although your MMA likely includes a minimum number of withdrawals each month, they tend to provide higher interest than high-yield savings accounts.
When you buy a bond, you are making a loan to the government or a corporation and they promise to pay you back, with interest. The average investor can have peace of mind with his investment, as the bonds are rated; you can find out how likely a company is to repay its debt, so you can choose the ones that align with your risk profile. Plus, bonds have a wide range of maturity dates, so you can choose one that works best with your timeline.
If you know you want to invest money for a short-term goal, but aren’t sure how or what to invest in, a robo-advisor can do it for you. When you use a robo advisor, you tell them your goals and how much time you want to invest. From there, the company’s algorithm will take care of the rest and allocate your money to the most logical investment options.
In general, robo-advisor returns can produce lower returns than stocks, but they aren’t terrible either. Just make sure you don’t pay so much in fees that any refund you get gets canceled out.
Check out our list of the best Robo-Advisors for 2022
How to decide which strategy is best for you
When it comes to deciding which investments work best for your short-term needs, it all comes down to your specific goals.
Ask yourself the following questions before transferring your accounts:
What is your time frame?
Your investment choices will be largely determined by when you need your returns. If you need them in a few months to a year, you’ll want the most liquid option available, which usually means a high-yield savings account, or MMA. However, if you’re looking at a longer timeline (for example, your next car down payment that you won’t need for seven years), a CD may be a better option that offers a higher interest rate.
What risk are you willing to take?
Typically, long-term investors can take on more risk if they choose to because their returns can be equalized over a longer period. That means investing in stocks, real estate, and even (for the more daring) crypto. Stocks have typically evened out over time, providing an average return of about 10%.
However, short-term investors should focus on liquidity. It’s better to earn a small return than to lose your money entirely because you were chasing returns.
What return are you looking for?
While short-term investors should focus on other factors, some investors seek higher returns than others. For investors willing to take on additional risk, they may want to steer their investments into more profitable companies, such as REITs or crowdfunding, for example.
What to consider when looking for a short-term strategy
When looking to create your own short-term strategy, you need to think very carefully about where your money is going. You don’t want to have your money tied up when you really need it. You also don’t want to end up losing your money due to poor investment decisions. Before establishing a final strategy, consider the following:
The best short-term investment strategy is to avoid risk. And unfortunately, less risky investments tend to have lower returns. Still, even low-risk investments beat money just sitting in your local credit union account.
Investing is not gambling
In general, you should never consider investing as a get-rich-quick option. Your chances of getting lucky buying the next big crypto or picking the next best value are extremely slim.
That’s why it’s important to mention the one investment that often offers the highest short-term gains: cryptocurrency. It’s easy to fall into this myth with Bitcoin billionaires seemingly happening overnight a few years ago. But be aware that this is not a safe investment option in most cases. The price of crypto is extremely volatile and you cannot be sure that you will have money left when you need it.
Related: Opinion: 6 Reasons Why I Don’t Invest in Cryptocurrency
Keep a closer eye
The sooner you need the money, the more you’ll want to keep an eye on the performance of your investment. For this reason, you will need investments that you can easily track. For many investors, it is much easier to understand the intricacies of CDs than it is to understand day-to-day trading and the ups and downs of the stock market.
When saving for goals in the near future, you may want to do more than stash your savings under your mattress. Investing your money can provide a return you wouldn’t otherwise get. However, you won’t necessarily want the same investments as your retirement portfolio.
Short-term investment strategies include options such as CDs, high-yield savings accounts, and bonds. The options you choose will depend on a number of factors, including your timeline, risk tolerance, and the return you’re looking for.
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