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Getting Started with Short-Term Investment: A Beginner's Guide

You might believe it is a bad time to invest your money when costs increase significantly, the financial markets are volatile and uncertain, and people worry about a potential recession.

Keeping cash seems even riskier because of decreasing value due to inflation.

There are two main types of investments — long-term and short-term. This article will focus on and explain the basics of short-term investments to help you understand them better and make informed decisions.

At Buffett Online School, we believe in investing in great companies you understand and utilizing Free Investing Resources to kickstart your investment journey is one of the best ways to learn.

What are Short-term Investments?

Short-term investments are quick and easy-to-sell financial assets that can turn into cash within five years. You can also convert some into cash within three to twelve months.

Sometimes, short-term investments also refer to specific financial assets owned by companies. These assets are recorded separately and listed in the current assets section of the company's balance sheet.

In contrast, long-term investments are held for a longer time.

Pros and Cons of Short-term Investing

Short-term investing can be enticing for investors seeking quick gains and flexibility. Unlike long-term investments, short-term strategies allow investors to cash out their investments without waiting for maturity, potentially leading to higher profits.

However, short-term investing also comes with its share of drawbacks. To decide if short term-investing suits your needs and goals, let's look at its pros and cons so you can make an informed decision.

Pros of Short-Term Investing

  • Short-term investing allows you to take out your money whenever you need it urgently.

  • You can make big profits in a very short time.

  • You can still earn profits even if the market goes down.

Cons of Short-Term Investing

  • Short-term investing can be costly because of the high number of transactions and the fees charged by brokers.

  • Taxes and inflation also lower the overall returns from short-term investments.

  • It requires a certain level of knowledge and time since you have to closely watch price changes and find the right times to buy or sell.

  • There are no benefits from compounding and no long-term advantages.

Strategies for Short-Term Investments

1. Finding the Right Trade

It's crucial to do thorough research to make a safe short-term investment. Look at the average price of a stock over specific periods, like 15, 50, 100, and 200 days. If the stock's average price goes up, you can buy it; if it's going down or staying flat, you might want to sell it.

Monitor market trends and business news, as they can affect stock prices.

2. Diversification

Diversification means spreading out your investments to lower risk and increase potential returns. Invest in different types of assets with varying levels of risk and returns. However, make sure the assets you choose are not too similar; they should be different to truly diversify.

3. Hedging

Hedging is a way to protect yourself from risk. To do this, you can use different strategies and tools to balance out the possible adverse effects of price changes in the market.

The wisest approach is to make another investment in a specific and controlled manner. It helps you reduce and manage the overall risk.

4. Exhausted Selling

Exhausted selling is a tactic used by experienced day traders. It involves buying assets at very low prices after panic selling caused by external threats. As the panic subsides, the asset's value may increase, allowing you to make a profit.

5. Real-Time Forex Trading

Real-time forex trading is about speculating on the future price movements of currencies. It uses technical indicators and advanced software to predict currency exchange rate changes. This type of trading requires sophisticated tools and knowledge.

5 Common Short-Term Investment Options

Here are some common short-term investments you can consider:

Online savings account or money market account

High-yield savings accounts offer annual percentage yields (APY) between 3.5% and 5%. That might not seem like a lot, but it's much higher than the national average interest rate of 0.42% for regular savings accounts.

The good news is that the FDIC protects high-yield savings. It means if the bank were to fail, your money is safe, and you are covered for up to $250,000 per account, per bank.

Money market account

Money market accounts are also protected by the FDIC, just like certificates of deposit. They are similar to certificates of deposit in how they work, but they may need a certain minimum amount of money to start, which can differ for each account.

Money market accounts usually pay less interest than certificates of deposit. Still, the advantage is that you can withdraw your money from a money market account earlier and with less hassle.

Cash management account

Robo-advisors and online investment firms (discount brokers) usually offer these accounts.

Cash management accounts let you invest in many different short-term options. They work similarly to regular bank accounts, allowing you to write checks using the money you've invested and move your money in and out of the account as needed.

Short-term bond funds

You can buy these short-term investments from companies that manage assets and handle investments. They involve some more risk, but they also have the potential to give you higher returns.

They consist of many bonds from different industries, making them less likely to have significant changes in value.

Bank Certificates of Deposit (CDs)

If you have money that you know you won't need for a specific time, CDs can be a safe option to save it.

When you put your money in a CD, you agree to keep it there for a certain period (like three months to five years or more), and the bank promises to pay you a fixed interest rate. Generally, the longer you keep your money in the CD, the higher your interest rate will be.

But be careful; putting your money in a long-term CD might not be the best idea if interest rates are rising. If you must take out your money before the CD time is up, you'll likely have to pay a penalty, usually equivalent to three to six months' interest.

And remember, some CDs may require a minimum amount of money to open an account.

Choosing Among the Short-Term Choices

Short-term investment options are great because they let you grow your money when you need to use it soon. But not all short-term investments are the same, and the best choice depends on how much time you have.

  1. One to Two Years - If you need money in one to two years, consider online savings, money market, or cash management accounts. These are safe choices with low risk, despite low rewards. They have a potential return of around 3.5-5%.

  1. Two to Three Years - Short-term bond funds could be better if you have two to three years. They have a bit more risk but can give you an average 1-2% return.

  1. Three to Five Years - Bank certificates of deposit (CDs) are an option for three to five years. They provide returns of around 4-5%.

Remember, each option has advantages, so choose wisely based on your needs and how long you can invest.

Should you invest in short-term investments?

Whether you should do short-term investing depends on your financial goals, risk tolerance, and time horizon. Short-term investments can be a good option if you have upcoming expenses or financial needs within a few years and want to grow your money safely.

It offers the advantage of liquidity, meaning you can access your funds quickly when needed. However, it's also important to consider short-term investments' potential drawbacks.

If your financial goals are more long-term, such as retirement or building substantial wealth, a balanced approach that includes short-term and long-term investments might be more appropriate.

Ultimately, investing in short-term options should be based on your financial situation and objectives.

Join Our Free 2-Day BOS Value Investing MBA

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Remember, you can cultivate the right investing mindset and unlock your potential to build wealth through intelligent investing. Together, we can create a network of educated investors who make informed decisions and contribute to their financial well-being!

In the meantime, feel free to check out some of our blog posts to continue learning. You can also join our BOS Telegram channel for more investing insights!

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