In order to maximize our gains from the market, there are a variety of short-term investment strategies that are available.
Short-term investment strategy is essentially a term that refers to all those investment strategies that do not continue for long.
Most times, companies and individuals look at converting this type of investment into cash within one year.
As a result, the main purpose of this kind of investment strategies is to yield short-term gains.
It normally contains any kind of investment that can be easily liquidated within a short period.
They can help individuals and companies expand their wealth over the short-term instead of just letting it remain idle.
Perhaps it is for this reason that this form of investment strategy is often incorporated by companies with high cash position.
In fact, these kinds of investment strategies are extremely beneficial for putting your extra cash to use.
The advantage is you can earn a much higher degree of interest on these investments within short time period.
So the typical options for short-term investment would include equity, debt and even short-term bonds.
Typically these are alternatives that can be market quite easily and recovering them does not require any additional hassle.
2 . Key Requirement for Short-term Investment
Before we go on to identify the various kinds of short-term investment strategies, it is very important to understand what would classify as a short-term investment.
First and foremost, these investment strategies have to include rather liquid investment options.
So, the simplest alternatives include the types of stocks, US Treasury notes and the like.
In many ways, they should neither have a long-term fix rate or should not have a restrict withdrawal formality.
When you consider a liquid investment option, it can also consider short-term paper with a shorter maturity date.
In fact, there are many commercial papers that mature within a fairly term period or under a year.
However, if your investment option is liquid, it also means that it is actively traded.
That means you can exit this investment as easily as you enter.
Examples of Short-term investment strategies
Before we go into the details of analyzing the various types of short-term investment strategies, it is extremely important to understand the essence of it.
Let’s use an example to understand this completely.
If you analyze Microsoft’s 2016 balance sheet, they had over $98 billion short-term investments.
Of this, the maximum investment was in Government and agency securities, almost $81.6 billion.
The other options, are included corporate bonds, foreign bonds, mortgages’ securities and even a variety of Certificates of Deposits.
- Marketable securities are one of the most convenient forms of investment with a short-term horizon.
- Another firm with very high cash levels is Apple that had close to $34 billion investment in securities in the last financial year.
- Treasury securities, mutual funds, term deposits or certificates of deposits were the other common forms of investment that the company had in store.
The reason I decided to explain my point with some actual examples is that this makes comprehension of short-term investment strategies relatively simple.
You have to understand that for any investment to fall in this category, it should be simple in both the terms of the investment and the ease of investing or withdrawing your investment.
Most importantly, these inevitably need to be high return options to justify being short-term investment bets.
Most times this is one of the key reasons why investors are keen about using these modes of investment for their short-term needs.
3 . Popular Short-term Investment Strategies
We have a shortlist of some of the most popular “short-term investment strategies”.
These are all high return with low-risk alternatives.
They will help you derive the maximum possible returns within the short investment duration.
But the risk is invariably the biggest concern in these limited time frame alternatives.
So the options that we have selected are the ones that can help you limit the risk quotient to a significant extent.
The ease of investing is another key factor that we have taken into account in curating these short-term opportunities for you.
– Use Roth IRA for Short-Term Investment
I can understand your confusion as you are reading this.
You must be thinking how you can use a retirement scheme as a short-term investment strategy?
Well, let me assure you this can be one of the most profitable short-term investment strategies.
In most retirement accounts like the 401ks and Traditional IRAs, you would have to pay a withdrawal charge for taking the money out early.
But the Roth IRA operates very differently.
You can withdraw the Roth contribution anytime as you use after-tax income to fund this account.
The advantage in this kind of short-term investment is it gives you the option to grow your money instead of it lying idle.
The fact that you are using the after-tax income means that most of your tax savings are already taken care of.
This is an additional saving that helps you take advantage of the easy withdrawal process.
Additionally, this kind of short-term investment strategies also helps you fund the retirement kitty even better.
– Using the Roth IRA Gives You Many Fundamental Advantages:
- Flexible withdraw and you can withdraw money anytime you need.
- Instead of paying hefty early withdrawal charges, you can easily address your immediate expense with this type of short-term investment.
- The Roth IRA has a much better rate of return compared to other short-term options.
The only problem with using this is your returns are not risk-free anymore.
There is a potentially large amount of risk associated with investing your money in bonds, stocks and mutual funds.
The Roth IRA often uses these channels to fund their overall investment returns.
One more important aspect of using the Roth IRA for funding your short-term investment strategies is finding a reliable broker.
In case your brokerage fails, there is no FDIC coverage.
Of course, the SIPC coverage will help you file a claim, but that won’t completely address your case.
There is no SOPC coverage for investment losses.
All you would get cover for is the loss from the failure of your broker.
Therefore, the basic investment remains at risk to potential failure if you do not choose a great broker.
In short, the quality of returns would be completely dependent on the type of broker that you decide upon.
However, if you want to avoid trading in the stock markets directly, this is a rather handy short-term investment strategy to help you achieve the same gains.
Additionally, the good news is you now have a wide range of online brokers who can help you open Roth IRA account.
The Risks Are:
Let’s face it; every kind of short-term investment has a relatively large amount of risk associated with it.
The trick is how you can use the investment strategies that offer you maximum yield with minimum returns.
This is exactly where the Roth IRA provides the perfect combination of returns, risk and convenience that you could explore over the short-term.
After all, who does not like to grow their money?
– Peer to Peer Lending Club
This is a rather modern investment alternative.
This type of short-term investment strategies uses convenience as the biggest catalyst for helping you expand your wealth.
In this investment strategy, the money is lent for a short time, and the user can earn interest on that.
The advantage is there is no lock-in period in this kind of strategy.
You can conveniently withdraw the money whenever you need to use it.
This is a very useful short-term option for individuals and those with a relatively small amount of money to lend.
There are many peer-to-peer lending websites now.
They have a simple login facility where they can sign up and start investing their money.
These lending clubs allow investors to expand the investment portfolio and cut down risk by diversifying.
For example, if you want to lend $5000, you don’t have to lend it to one person, you can lend it to 10 people.
That significantly cuts down the risk associated with the investment.
– Lenders and Borrowers
The website, in this case, plays a crucial role in connecting a wide number of interested lenders and borrowers.
Investors, in this case, play the role of a temporary bank from which consumers can borrow for the short-term.
Repayment normally happens to monthly installments, and you can easily make your wealth expand through this method quite conveniently.
Interest rate, in this case, is set as per the credit score and background of the borrower.
The screening process for borrowers is also extremely strict.
This significantly cuts down the scope for loan default.
It is needless to mention that this makes these short-term investment strategies rather safe and uncomplicated.
Most of these lending clubs are rather flexible about the amount that you can invest.
Normally the lending amount can range from a few hundred dollars to as much as $10,000.
The investor’s convenience is primary.
- How much to invest
- The time period to invest
- The level of risk they are open to accept
Overall, then this kind of short-term investment strategies provide both flexibility as well as convenience for the investor.
Moreover, the fact that this is a short-term opportunity means that there is never any scope for being stuck in this kind of investment option for long.
If they are not comfortable with the overall experience, you can easily withdraw from it that very moment.
– New Savings Account
Let’s say that you have a small amount of money that you are not too keen on deploying anywhere.
But at the same time, you don’t mind a few additional dollars as return on it.
One of the simplest short-term investment strategies would be to open a savings bank account.
There are several online high yield accounts that you could take advantage of. Investing in these accounts is rather simple.
Withdrawing from these accounts is not difficult either as there are no set lock-ins for these savings accounts.
There are several advantages of using savings account for short-term investment strategies.
- Your principle amount is guaranteed, you will never lose that, come whatever
- There is no fixed duration for your investment.
- You can keep it as long as you like
Make sure the amount that you invest in the bank is below the FDIC coverage amount of $25,000.
Simply deposit your money for the short-term and then totally forget about it.
The Returns on This Kind of Short-Term Investment Is Risk-Free And…
- You can cash out anytime you like.
- There are no pre-conditions in terms of when you can withdraw it.
- There is no expense involved in withdrawing the funds either from the bank.
- You can use the funds whenever you need it.
However, you cannot use it as the only means of savings.
You would have to substantiate it with several other savings alternatives too.
Just relying on these would yield very limited returns.
But in doing that, you have to judge the potential risk associated.
It is needless to mention that this kind of investment involves significantly limited earnings prospects.
So, if you plan to choose this kind of short-term investment strategies, you would also have to contend with rather limited returns.
– Certificates Of Deposits
When we discuss short-term investment strategies, there are some alternatives that come quite naturally to your mind.
The Certificates of Deposits is one such option.
It is a straight-forward mode of investment and one of those great short-term strategies.
It can help optimize that value of every penny that you save and earn.
Whether you are comfortable with conventional or online banking , you can easily adapt the certificates of deposits to suit your needs and requirement.
They can easily become convenient options to help grow your money quite unobtrusively and at a comfortable pace.
Moreover, the options for investors are pretty huge at the moment.
Banks have come up with a rather large number of alternatives ranging from 3 months to 5 years.
This means even in the list of short-term strategies, you can decide how short-term you want your investment to be.
You can choose certificates of deposits that are best suited to the duration that you might be looking for.
While it is common knowledge that the returns increase depending on the duration of the investment, it gives you a viable option to grow your money even within a short period.
Moreover, you can also choose to earn monthly interest depending on the duration of your certificates of deposits.
That means that even the interest that you earn can be paid to you as per the timeline that you are most comfortable with.
The only problem with this kind of CDs is early withdrawal.
I know you must be thinking these are anyway short-term options.
But there are some moments when you need to pull the money put.
In that case, you would have to pay a fee for early withdrawal.
Now, this fee is generally equal to 3 months of interest or more.
So it is needless to mention that it is a bit of profit through these Certificates of Deposit.
The Interest Rate
But that said, the rate of interest is much higher in Certificates of deposits compared to many other short-term investments.
That means the relative amount that you can earn over a period increases substantially.
This means you can easily take the risk of a hefty early withdrawal fee.
After all, the chances are fairly limited comparing to the high returns that you can earn every time you invest in certificates of deposits.
– Create a Money Market Account
If your main criterion is all about maximum returns without the risk profile, then create a money market account.
The money markets provide stability, returns and are also dependable and safe with a relatively low-risk element.
Moreover, the money markets are extremely flexible short-term savings opportunity that helps expand your wealth.
In fact, money markets are faring almost at par with one-year certificates of deposits.
Of course, it would need you to have a focused and disciplined approach in the whole process.
That would also help you significantly enhance the rate of return that you can hope to get from these money market accounts.
These days, the Money Market accounts provide its depositors with features like checks, ATM cards and deposit slips.
This addresses one of the fundamental concerns of short-term investment strategies.
I Am Referring to Hassle-Free Withdrawal.
This specific feature makes sure that withdrawing money from money market account is rather simple.
A simple swipe of the ATM card solves the problem for you.
You have to understand that the money market accounts are closely dependent on the amount of money you have in your account.
The time that you invest the money is not relevant.
The flexibility that money market accounts provide is the biggest advantage that they have.
When rates of CDs (Certificates of Deposits) rise, clients can easily move their money from money markets to CDs.
They do not have to pay any penalty for this.
Additionally, there is no fee for early withdrawals either.
This means that users can easily shift their funds around without any hassle.
All that they would have to consider is their convenience and the scope of returns that they can expect.
– Short-term Bond Funds & ETFs
This is a rather recent addition to the list of viable short-term investment strategies.
But the rate of return that they offer, the kind of money that you can invest in and most importantly the duration involved makes this a rather convenient and consolidated form of short-term strategies.
Generally, the professional financial advisors manage the Short-term bond funds.
Though bonds are not as stable as the money markets are, they sure offer best risk reward ratio compared to stocks.
Most importantly, though a short-term option, it helps you earn significantly higher returns on the same investment.
There is no solid rate for bonds. This is essentially a function of the market.
Depending on the demand and supply metrics, the rate keeps changing.
The return prospect can be in fact compare to stocks in many ways.
Though you have bond investment for a wide range of time duration, we are considering only the short-term bonds.
These mature in 2 years or even less.
As a result, this works as a convenient short-term alternative to take forward your investment goals.
ETFs or exchange traded funds are also a function of modern market dynamics.
They operate pretty much like mutual funds and use Index to derive the underlying valuation.
However, the biggest advantage is unlike mutual funds, ETFs do not have set lock-in period and you can exit at any time.
There is no withdrawal fee or penalty associated with it either.
So, therefore, it allows you to take advantage of the stock market returns while you enjoy the protection offered.
After all, this is the best case scenario for investing over the short-term.
For both bond funds and ETFs, investors need to have an online Demat account.
You can transact in these accounts through online brokers.
Therefore in terms of convenience, these are like perfect alternatives to expand your money over the short-term.
The rate of returns is also market dependent.
So, it means that you can expect a reasonably high rate of return that justifies your overall purpose of investing the money.
– Municipal & Corporate Bonds
When we are discussing bonds that can prove to be viable short-term investment strategies, it is hard to not mention municipal and corporate bonds.
Of course, given the rate of return that these bonds yield, they are undeniably riskier comparing to the various treasury notes.
The biggest risk in municipal and corporate bonds is undoubtedly the interest rate risk.
Now, this is not entirely dependent on the function of the market forces.
It is closely related to the economic situation of the country that they are in.
In the case of a relatively low-interest rate environment, the bond value decreases to compensate for the market imbalance.
So, Let Us Use an Example to Completely Get to the Bottom of This Issue.
Let’s say that you can expect 4% on a municipal bond today, but suddenly tomorrow you could be on the losing side.
It can so happen that the bond loses 6% of its value and you are redeeming it that very day.
The good thing is that the bond value does not get impact if you are not withdrawing the investment.
If you can hold this type of bond for the complete period of its maturity, you will get 100% of the investment back and the additional rate of return too.
For creating completely effective short-term investment, you can look at buying the existing bonds from other investors.
You can complete this transaction through a brokerage which is dealing with these bonds.
Corporate bonds are a relatively riskier comparing to the municipal bonds.
They have no government backing and are invariably more volatile in terms of rate fluctuation.
However, that said, the increased rate of risk always helps generate a higher rate of return.
So if you have a risk taker and calculate your risk exposure precisely, you can quite easily use corporate bonds as an effective short-term options.
Moreover, this kind of investment strategies can be rather impactful in helping you derive maximum value for the money that might be lying idle.
You can easily take advantage of this short-term investment tool and make the most of the given opportunity.
So There Are Many Short-Term Strategies That Exist
Therefore, we can conclude that there are many short-term investment strategies that you could use to expand your wealth.
Remember no one will pay you additional money for free.
So if you can use your extra cash to generate more money, there is absolutely no harm in doing it.
The basic idea is to increase the money without any additional pressure or time limitation associated with it.
The short-term strategies are all about creating value in a constructive manner without unnecessarily increasing the costs and expenses.
Of course, you can always look at getting a credit card with lower rates and cash backs or reward points for greater optimization of wealth.
But the advantage of these investment strategies is that they embody maximum return with minimum risk.
Moreover, the Rate of Savings or Return Through Cash Back Cannot Be Sustainable for the Consumers.
Yes, paying credit card debt can be an option, but that too will take the time to completely realize their true value.
It will work incrementally in bringing down the expenses incurred due to the financial changes and other related expenses apart from the interest outgo.
You must understand that investment strategies are essentially about adding more value to your existing wealth without altering your other plans.
The idea is to put your extra money to good use over the short-term and use strategies that best suit your investment goals.