Best short term investments: the top 10

Which investment is best for the short term?

Generally, short term investing is done with one of two things in mind: either to take advantage of short-term market opportunities or fluctuations, or as an alternative to cash for capital that is needed in the near-term future. This article identifies investment products that are congenial to the second purpose mostly, for investment timelines of 5 years or less.

Money market, Brokerage and Investing Account (U.S. or other)

Keeping money uninvested in a money market, brokerage, or equivalent account may seem like a waste of productive investment capital to some, but in the midst of global market upheaval, saving cash in reserves can be a wise option.

Many U.K. accounts offer around 5% interest for cash that sits there, albeit without the traditional government protection that checking and savings accounts offer. These accounts are very low risk though, as long as the banking institution is a reputable one.

High-yield Savings Account (U.S., Europe)

Savings accounts on both sides of the pond can either be fixed-rate or variable-rate accounts, with fixed-rate accounts having interest rates locked in for the promised duration. Interest will likely be in the range of 0.25% to 2%, and even variable-rate accounts will probably remain in this range indefinitely, though high initial rates often give way to more modest rates after 3-6 months.

To maximise returns in these accounts, continue to look for higher yields if interest rates decline. Depending on the type of savings account, deposits and withdrawals may be restricted in amount and the bank may require notice for withdrawals. With more restrictions usually comes higher interest rates, however.

Short-term Corporate Bonds (U.S., Europe)

All types of bonds fall into two types: “investment grade”, and “below investment grade” (also known as “junk” bonds). Junk bonds are bonds that have been rated by credit agencies as being higher risk since the issuer has a greater risk of defaulting on repayment. Because of this, they have higher yields than better rated bonds.

Investors looking to store capital in one of these assets in the very short-term should stick to investment grade bonds, or at least diversify their junk bonds with a fund like PIMCO’s UCITIS ETF, which specialises in short-term corporate bonds with less than 5 years to maturity and generally yields between 2.5% and 3.5% annually in disbursements.

Short-term Government Bond Funds (Americas, Europe)

Government bond yields might not look like much at the moment, but events in 3rd quarter 2021 have caused bond yield projections to be adjusted in favour of higher returns going into 2022 after speculation that rising inflationary pressure may persist.

However, with short-term government bonds for the U.S. and Europe so dismally low (U.S. 1-year treasury bonds are yielding .06%), indirect investment in longer term bonds through diversified bond mutual funds and ETFs is clearly the better play, where yields are around 1.5% to 2% annually.

Cash Management Account (U.S., Europe)

Cash management accounts are fully-automated investment accounts with personalised options for the owner based on their selected investing time horizons and risk tolerance. Conservative investors with lower risk tolerance will be steered towards a more traditional portfolio with a large minority percentage in fixed-income securities and 50-70% equities, with some cash reserves and utilities investments.

More aggressive strategies for much longer time horizons will likely be almost entirely equities and cash, with small holdings in fixed-income securities and commodities. These accounts can be used as savings accounts, but keep in mind that withdrawals will trigger sales of securities that will have tax implications.

5-year Treasury Inflation-Protected Securities (U.S. treasury)

Treasury inflation-protected securities (TIPS) are U.S. government bonds with 5, 10, or 30 year terms, with the principal invested amount being adjusted for inflation according to the consumer price index (CPI) of the U.S. economy as often as the CPI is updated.

The additional adjusted principal amount also receives the same interest rate. Interest rates are decided at auction on the website TreasuryDirect.gov. Just as the original principal amount can be adjusted upwards for inflation, it can also fall due to deflation, though investors cannot end up with less than their original investment, which is protected. Profits are also completely free from government taxation, though even non-U.S. citizens can invest in them.

Covered Call Options (all options markets)

An excellent way to boost returns on equities already held is to issue covered call options on those securities. If an investor controls a sufficient quantity of an underlying security (usually 100 shares), they can issue this type of call option, which allows the buyer to buy 100 shares of the underlying security at the strike price either at maturity (European options) or anytime (U.S. options).

There are several factors that influence how much the call can be sold for, including strike price, time to expiration, and the volatility of the underlying equity. For a call, the price of the underlying equity being above the strike price means the buyer has made money, and the seller must pay out, but this is offset (“covered”) by the gain in the underlying equity.

If the price of the security increases during the duration of the call, the seller still makes money equal to the selling price of the option at least (and perhaps more if the strike price was above the price of the equity at time of sale). These options are essentially riskless, and mitigate some of the risks of holding the underlying security.

Certificates of Deposit (U.S.)

Certificates of deposit accounts (CDs, not to be confused with credit-default swaps, also called “CDs”) are accounts offered by U.S. banks that act similar to some high-yield savings accounts (see above) that have restrictions. A CD ties up the capital invested for its duration and offers higher interest rates than many savings accounts, with early withdrawal penalties being forfeited interest.

CD durations have typically been anywhere from 3 months to 5 years, though most commonly they’re 1-2 years, and currently the top interest rates are between 0.35% and 1.15%. Some rates at larger banks will be lower since better rates are often offered by smaller banks trying to attract new customers.

Peer-to-peer lending (U.S., Europe)

Peer-to-peer lending platforms have become increasingly popular in recent years as personal loan interest rates have defied low interest rate trends. As with bonds, loans for borrowers are graded according to the creditworthiness of the borrower and the likelihood of full repayment, with higher interest rates reflecting increased risk.

Lending platforms offer options with automated or non-automated portfolios of slices of different loans, though with both options, the investor specifies their risk tolerance and then fills their portfolio accordingly.

The automated option, however, automatically reinvests repayments into new loans. Rates of return can vary from 5% to 15% or more under normal circumstances, where the main risk is economic recession and large-scale defaults on payments.

Low volatility ETFs (Americas, Europe, Asia, Oceania)

ETFs with strong records of consistent growth, decent dividend yields, and low volatility are excellent places to invest cash when there’s a shorter time horizon. These ETFs should not have exposure to any single security in excess of 5% of the portfolio, and ideally no more than 2% of the portfolio.

More stable ETFs will likely consist of large-cap companies primarily, with small holdings in small-cap or medium-cap companies as well. Before investing, investors should consider how affected a given fund has been by economic turmoil like the Coronavirus Pandemic or economic recessions and measure this against their risk tolerance.