If you think there is a little too much risk in the stock market now, come across some extra money lately, or are looking to somewhere to invest for the short term there are some really good options out there for you.
Short term investments are investments that are temporary in nature as the the holding period is generally expected to be one to five years or less.
Long and midterm investments typically allocating funds in stocks and/or real estate for purposes of investing for the midterm or long haul, but those investment vehicles may not be the best option for people looking to invest on a shorter time period.
Let’s say for example you are saving money for a down payment on a house or car you plan on buying next year and you do not want to risk your money in the stock market. In this scenario, you could look to a short term investment option.
If you are considering investing for a time period under 5 years, you will want to look for relatively liquid investments (meaning you can get your money back if you need it), that tend to be low risk, but still provide a return.
Below is a solid list of short term investment options for you to consider.
1. Pay Off High Interest Debt
Maybe paying off high interest debt does not first come to mind when thinking about short term investments; but it could be the smartest move. For example, if you have debt that has an 10% interest rate paying that down would provide you essentially a 10% return on your investment.
On top of that, paying down debt is similar to achieving a risk free return; when you pay down your debt you will no longer be charged interest on that amount. The money you save on the interest is your “return”.
An additional benefit of paying off high interest debt is that you would be putting yourself in a better overall financial position and potentially increase your credit score.
It is important to consider your overall financial situation and determine which investing strategy best fits your goals. When looking for a short term investment, these options could work well for you. Understand that the investment world changes often and you should continually evaluate options as they are presented to you.
Note that investing for the short term, where you are looking for low risk and relative liquidity is typically a different strategy than investing for the long term.
Related: Smart Beta & Fixed Income: A Surprisingly Perfect Match
Pros:
Risk Level: Risk Free
Rate of Return: High, when paying off high interest debt
Cons:
Not as straight forward if you have lower interest rate debt
2. Municipal Bond
Municipal bonds are issued when state or local governments need to raise money. Municipal bonds are considered only slightly more risky than U.S. securities, mainly because municipals have in the past paid less then owed or defaulted on the issued bonds.
Two recent municipal examples being Detroit in 2013 (largest US city to declare bankruptcy) paid less than they were owed on their bonds. Also, on July 1st, 2016 Puerto Rico defaulted on their debt (first time a state or commonwealth has done so since 1933.)
On Wall Street these municipal bonds are often called “munis” and are classified into two segments, determined by how the issuing entity gets the funds to pay the bondholders. The two segments are general obligation bonds and revenue bonds.
General Obligation Bonds (GO) are issued for entities that possess the ability to levy and collect taxes. Given these entities can levy and collect taxes, typically the bonds are issued for free public use such as schools, prisons, police, fire rescue, and government buildings.
Revenue Bonds are issued for entities that possess the ability to charge fees or generate other charges by the specific public project being funded. An example being a municipality issuing revenue bonds to fund construction on a new sports stadium, the revenue attained from ticket sales, parking fees and concession sales would go towards paying the interest payments and principal of the bonds issued.
You can buy municipal bonds directly from the municipality or invest (with investment firms) through bond funds (mix of municipal bonds.)
Pros: Risk Level: Low
Rate of Return: Middle
Liquidity: Middle
Cons:Chance of default, ideally offset by rate of return
3. Corporate Bonds
Similar to municipal bonds when a corporation needs to raise money they can pursue two types of financing; equity financing and/or debt financing. The equity financing is stock offering while the debt financing comes in the form of a corporate bond.
Corporate bonds are agreements between a corporation and an investor(s) for which the investor lends money to the corporation for a agreed upon time frame at a agreed upon interest rate.