If you’ve got cash to invest, but you need it in the next 5 years, then you may be considering short term investments. When interest rates are low and inflation is running high, many of us look for alternatives to cash savings.
Here we take a look at everything you need to know about short term investments. We also answer common queries like “What is the effect of inflation on short term investing?” and “How to start short term investing.”
What is a short term investment?
Short term investments are investments that you intend to own for a short period of time, usually less than 5 years. These investments can be converted quickly to cash if needed.
Some investors class short term investments as those held for less than 1 year and consider investments held for 1 to 5 years to be medium term investments.
Common assets for short term investing include gilts, bonds and cash. Short term investors often avoid equities and other types of assets that fluctuate significantly in value. That’s because there’s a significant risk that you’ll need to sell during a market slump and lose money on your investment.
Is short term investing higher risk than long term investing?
Whether short term investments are more risky depends on the type of investment you have chosen. Some assets, like equity, may be more risky for short term investors. This is because they fluctuate widely in value and there is a risk you will need to withdraw your money just as the value has dropped. You can’t afford to wait until an investment bounces back from a price slump.
You can minimise your short term investment risk by picking investments that tend to fluctuate less in value like money market funds, bonds and fixed term savings accounts.
Can I make money with short term investments?
It is harder to make money with short term investments than longer term investments. However, even if you’re investing for a short period, it’s still important to try and get the best return possible. Here are some short term investments that tend to beat a simple cash savings account:
Fixed term savings accounts
Bond funds
Commodity funds
Money market funds
What are my short term investment options?
This table shows your investment options for short term investing and the other information you need to know:
Type of short term investment
Available from
Description
Most suitable for
Easy access cash savings accounts
Bank or building society
Low interest rates make it difficult to get a good return with cash investments.
Short term savings that may need to be accessed quickly.
Fixed cash savings account
Bank or building society
Slightly higher interest rates are available if you can afford to lock in your money for at least 2 years.
Medium term savings that you don’t need in the next 2 years.
Short term government bonds
Stocks and shares ISA or shares trading account.
Sold by the government and often fluctuate less in value than equity funds.
Short term investments or part of a long term portfolio to balance out higher risk investments.
Money market funds
Stocks and shares ISA or shares trading account.
Invests in cash, cash equivalent instruments and certificates of deposit.
Short term investments or part of a long term portfolio to balance out higher risk investments.
Commodities funds
Stocks and shares ISA or shares trading account.
Invests in raw materials, precious metals and energy resources. You can also buy a fund that invests in mining or energy companies.
Medium term investing. Commodities tend to fluctuate more than cash, and bonds are more suitable for medium term investment.
Strategies for short term equity investing
If you do want to invest in equities for a short period, here are some strategies you can take to minimise your risk:
Research your investments and make sure you understand the risk and likely fluctuations in price over time.
Diversify your investments. Individual stocks and shares fluctuate much more in value than an overall stock index. A diversified portfolio invests in a range of equities across different industries and geographies.
What to watch out for with short term investments
Although some types of investment tend to be lower risk, it’s impossible to completely remove investing risk. Even so-called “safe” investments can show big swings in value in some circumstances.
For example, the current spike in wholesale energy prices has led to big changes in value for some commodities funds. The crisis has caused energy stocks and some commodities values to increase in value, but they could fall significantly again if energy prices reduce.
What is the effect of inflation on short term investing?
With inflation currently running at a high level, there’s a risk that inflation will erode the value of your short term investments. It is increasingly difficult to inflation-proof your short term investments as interest rates are at a historic low at the moment.
If you don’t need to access your investment for a while you could consider investing in a money market fund or bonds. These tend to have slightly higher returns than a cash savings account.
How do I know if short term investments are suitable for me?
If you’re unsure how to invest then it’s a good idea to get advice from an independent financial adviser. They’ll be able to look at your circumstances and advise you on the most suitable investments. In general, short term investments may be suitable if the following applies:
You need to access your money in the next 5 years.
You don’t have an emergency fund. It’s a good idea for most people to save an emergency fund somewhere they can access quickly. This is money you can use if you have a financial emergency like an unexpected bill or a job loss.
You are saving for something specific, like a new car or a house deposit.
You are nearing retirement and hoping to buy an annuity. It’s important to get financial advice if this is the case.
How to start short term investing
If you want to start short term investing then here are some suggested steps:
Make sure you have an adequate emergency fund saved in cash.
Consider when you need to access your investment. In general, the longer the investment term, the more risk you can afford to take.
You can get help on short term investing by booking an appointment with an independent financial adviser. They will look at your circumstances and advise you on the best short term investing options for your circumstances.
Where can I find short term investments?
There are several options for investing in short term investments. Here are some ways to start investing:
With inflation running hot, we need to try and get the most from our short term investments. It’s also important not to take on too much risk with money we know we’ll need to access soon.
That’s why I’d recommend thinking about when you’ll need to access your investment and how much risk you can afford to take. With a bit of research, you’ll be able to make sure your short term investments are working hard to build your wealth.
Pros and cons
Here are some of the pros and cons of short term versus long term investing.
Pros
Short term investing is more suitable if you need the money soon for something specific. You won’t need to wait for a long time to access your cash.
It may be possible for investors to make substantial profits in a short amount of time. However this may be more to do with luck than judgement as markets are notoriously hard to predict.
Cons
Short term investments may provide lower returns as most investors choose a lower risk type of investment.
It is usually more risky than longer term investment as you can’t afford to wait until the market bounces back from a slump.
You may have higher investment costs due to a larger number of transactions.
Bottom line
Like all investing, different factors affect the best type of short term investment for you. Thinking about when you need to access your investment and how much risk you want will help you pick the most suitable type of short term investment. It’s especially important to try and minimise your investment risk if you might need to access your investments soon.
Frequently asked questions
Short term investments are usually held for less than 5 years.
The best investment option depends on your circumstances and whether you can afford to take a risk with your investment. If you are saving money for something specific and you will need it in less than 1 year, then a cash savings account may be the best option.
3 short term investments are a cash savings account, a money market fund and a bonds fund. They are all fairly low risk as they tend not to fluctuate a great amount over time.
Short term investing is often worth it because almost any type of investment is likely to beat the interest you will get on money in your current account.
Short term investing may be profitable, depending where you decide to invest your money. Many short term investors decide to avoid high risk investments. This means that short term investing may be less profitable than long term investing.
If you are only investing money for 1 month, you need to be able to access it quickly and easily. An easy access savings account may be the best option.
All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Past performance is no guarantee of future results. If you’re not sure which investments are right for you, please seek out a financial adviser. Capital at risk.
Alice Guy is a Suffolk-based finance writer, a busy mum of 4 older kids and a self-confessed personal finance geek. She trained as a chartered accountant with KPMG London before working for Tesco Plc as a business analyst. She loves to write about budgeting, saving, investing and building wealth. See full bio
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