If you are looking to invest money that you intend to use in the not-so-distant future, then, you face the challenge of the delicate balance between making a decent return on your investment and ensuring that you can get all of it back when you need it.
What Are Short-term Investments?
Short-term investments are assets that can be converted into cash or can be sold within a short period of time, typically within one-three years. Common instruments for short-term investing include short-term bonds, Treasury bills, and other money market funds. Short-term trading or day trading entails a significant degree of speculation and, consequently, substantial risk.
Advantages Of Short-term Investing
Short-term investing offers flexibility to the investor as they do not need to wait for the security to mature in order to get cash. On the other hand, long-term investments can be liquidated by selling in the secondary market, but the investor earns lower profits.
Investors can make substantial profits in a very short amount of time and it is less risky as money invested per transaction is substantially lower.
Strategies For Short-term Investments
In seeking a place to invest or save your cash for the short term, your priority should be for you to get your money back at a particular time. This is crucial because you often need to have the money in a specific time to meet obligations such as a down payment on a house, wedding expenses, your children’s tuition, or to meet your budget for a scheduled vacation.
On the other hand, while you want to keep your money safe, you also want a decent return on your savings. It is unlikely that you will earn as much in a short-term investment as you would in a long-term financial instrument. Long term investments usually offer greater returns, but their prices are more volatile than short-term investments. While the company stock price may rise multiple folds over several years, it could decline during the next few months. You may also face the challenge of finding a buyer for the long-term asset that you have purchased. Short-term investments, however, are often highly liquid, allowing you to cash out quickly should the need arise.
However, because short term investments often present lower returns than longer-term investments, some people do not bother to invest at all. You are better off investing it in an interest-earning instrument. You should also avoid taking excessive risk in a search for higher returns. Unusually high yielding instruments present unacceptable and greater risk. In some cases, such instruments are disguised as Ponzi schemes or similar arrangements.
Suitable short-term investments are typically characterized by stability in value, liquidity and low transaction costs. These features mean that your money will be safe and accessible when you need to use it, which is a significant reason to have short-term investment. If investors are investing money for three years or less, a few principles will help them. Set reasonable expectations because short-term investments typically have lower potential returns than long-term investments; Focus more on the safety of your investment than the return; A little extra return may not be worth the additional risk.
Disadvantages Of Short-term Investment
Every investment has its own disadvantages. Short-term investing comes with high costs due to a high transaction volume and their corresponding brokerage commission fees. Taxes and inflation also reduce the returns earned via short-term investing. It involves a certain level of expertise and time, as investors must closely monitor price movements and identify purchase and/or sale spots.
