Luisa Rollenhagen is a journalist and investor who writes about financial planning for Wealthsimple. She is a past winner of the David James Burrell Prize for journalistic achievement and her work has been published in GQ Magazine and BuzzFeed. Luisa earned her M.A. in Journalism at New York University and is now based in Berlin, Germany.
When we talk about investing here at Wealthsimple, we play the long game. Our investment strategies tend to focus on long-term goals like retirement, saving up for a house, or a college fund. Either way, long term investing tends to look at least ten years into the future. And while those kinds of financial plans are vital and integral to any healthy financial foundation, you maybe also want to save up—rather quickly—for something fun that’s a bit more short-term. Maybe you’d like to upgrade your car, or go on a really indulgent vacation, or just want to try a more aggressive investing style that’s more high-risk/high-reward than average long term strategies. That’s where short term investments come in.
But before we dive in, it’s important to get one thing clear: Short term investments that might work for some investors might not work for you, and what can be considered the “best” varies from investor to investor. Your tolerance for risk and your goals are going to strongly determine what kinds of investments you’re best suited for.Wealthsimple Invest is an automated way to grow your money like the worlds most sophisticated investors. Get started and we'll build you a personalized investment portfolio in a matter of minutes.
What are short term investments
Short term investments can be a strategic way to grow a certain amount of money. The key term here is “a certain amount.” You shouldn’t put all of your retirement savings into short term investments, as the point of a short term investment is to pull out your money in a fixed—and relatively short—amount of time. Usually, we’re talking five years or less. After all, short term investments are usually pursued when you’re saving for a specific goal, like a down payment for a house or a wedding.
And when you’re looking at short term investments, it’s not a bad idea to stay away from the hot stock that everyone can’t stop talking about or at the very least set yourself a budget (which you should be doing anyway) and invest an amount you’d be comfortable theoretically losing. For all other short term investments, most people look for something with low risks and a history of steady returns. As long as you keep these qualities in mind, there’s no reason why a short term investment can’t be a savvy money-growing strategy.
Best short term investments
Here are some common short term investments and strategies that investors looking for easy access to their money tend to choose:
Certificates of Deposit
Certificates of Deposit (CDs) function as loans that you give to a bank, but unlike with traditional savings accounts, you’re not able to access your funds for a determined period of time. In exchange, you can expect higher returns (some even pay over 3% annually). The longer you keep your money in a CD, the higher your return rate will probably be, and average lengths are usually 3 to 5 years.
You can technically withdraw your money before the agreed upon date, but you’ll be facing an early withdrawal fine.
Municipal bonds are issued by local or state governments and function as loans (see a pattern?) you give to the government so that they can complete public projects like expanding infrastructure or building new schools. In return, you get to collect interest.
The nice thing about municipal bonds is that the interest earned is usually exempt from federal taxes and in some cases even state taxes, and the bonds are backed by government entities. This means municipal bonds are usually considered to be low-risk (although not altogether risk-free; there’s always the chance of a government or any other backing entity defaulting). Like many other options in this article, your money tends to be locked in for a three- to five-year period.
If you want to supplement municipal bonds with the private sector, corporate bonds are another option. The difference is that corporate bonds are not backed by government entities, so you’ll want to research the companies you’re investing in to make sure they have a history of steady returns.
Nonetheless, bonds tend to be considered a low-risk investment options, especially when you’re only investing in them for a short-term period (under five years).
Another bond-oriented option are treasury bonds. Treasuries are bonds issued by the Unites States Treasury [For Canada: Bank of Canada]. They’re considered one of the most stable investment options because they’re backed by the Unites States federal government [for Canada: backed by the Canadian central bank]. Treasuries have held up through recessions, wars, and other crises, so they tend to be considered quite safe in terms of getting the total of your investment back.
There are a couple different kinds of treasuries depending on how long you want to have your funds locked up. They’re called T-bills, T-bonds, and T-notes, and offer different levels of returns and are held for varying amounts of time. T-bills are usually only held up to a year, whereas T-notes are held for two to 10 years. T-bonds can be held for 10 years or more.
Investing through a robo-advisor
If you do want to go down the traditional investing route (ie. stocks and bonds), then investing through a robo-advisor as opposed to through a traditional managed fund or through a stock broker is another option you could pursue.
One of the good things about investing through a robo-advisor is that you can keep your costs down quite significantly (thereby leaving you with more money to invest and reap returns from). Robo-advisors tend to invest your money in low-cost ETFs, and since your portfolios are managed by an algorithm instead of an actual human, your management costs are much lower.
It’s best to keep in mind when investing with a robo-advisor for short-term purposes is that a portfolio should probably lean more heavily toward bonds instead of stocks. In the short term, stock prices can be rather volatile and the risk of losses may be greater. Bonds, on the other hand—both municipal and corporate—tend to be associated with lower risk.
Best accounts for short term investments
Unsure of what accounts to fall back on when trying to grow your money in a short amount of time? These are some good places to get started:
High-yield savings account
Most savings accounts tend to have abysmal interest rates, but online-only banks have started offering high-interest savings accounts that offer more competitive returns. That’s because online financial institutions have relatively few overhead costs in comparison to brick-and-mortar banks (no extra rent for branches, for example) and can pass those savings on to you in the form of higher interest rates. You can find high-yield savings accounts online that pay much more than standard deposit accounts.
Some high-yield savings accounts even have annual interest rates of 2%, which is way higher than the normal 0.03% you can usually expect from regular savings accounts. There are also accounts that provide higher yields than standard savings accounts by actually investing your money in ETFs that consist of government bonds. The extra few percentage points could amount to a decent amount of money over a number of years.
Money Market Accounts
Money market accounts allow you to deposit a certain amount and earn interest on that amount. Think of a money market account as something halfway between a checking account and a savings account.
The interest you get paid on a money market account is usually based off of the current interest rates in the money markets. And because money market accounts calculate interest based on how much you have in your account as opposed to how long you leave it the account, it can be a popular option for those who want to grow larger amounts of money. As opposed to other options on this list, you can also access your funds whenever you like.
While this may seem a bit counterintuitive, Roth IRAs can allow you to grow your money in the short term. Of course, a Roth IRA is primarily a retirement account, and it should continue to stay that way. But Roth IRAs can also be a good short term investment vehicle because the account allows you to withdraw funds at any point, tax- and penalty-free. That’s because the contributions in your account have already been taxed.
Plus, Roth IRAs allow you to invest in a variety of assets such as ETFs and mutual funds. Just keep in mind that you are under the age of 59½ and the account has been open for less than five years, you may have to pay taxes and penalties on earnings in your Roth IRA.
Alternatives to short term investments
On the whole, if you have a longer timeframe and don’t need to withdraw your money in five years time, you can take advantage of more investing options. If you’re able to invest for ten or more years, you’re able to ride out natural dips in the market, as long as you don’t panic and withdraw your money the minute your stock prices start dropping. The market is cyclical, so riding out the cycle is much more doable if you have a longer timeframe with which to operate.
That means you can choose to invest in riskier assets like stocks, but also put more weight behind ETFs, who really shine when it comes to long-term growth. When considering long term investing, you’ll mostly want to stick to the portfolio you, your financial planner, or your robo-advisor has created for you, and only rebalance when necessary. As Warren Buffett has has said about the benefits of long term investing: “Our favorite holding period is forever.”
The benefits of long term investing—meaning ten years or more—are numerous and well-documented. Long term strategies are often used to pursue unflashy but steady growth. The most important component? Your patience and ability to not make any hasty decisions, even if the market is currently going through a low point.
We might be a little biased, but we’re pretty confident that the best place to invest for your financial future is with Wealthsimple. We offer state-of-the-art technology, low fees, and the kind of personalized, friendly service you might have not thought imaginable from an automated investing service. Get started or learn more about our portfolios here.