How to Invest for the Short Term

What is a short-term investment?

If you’re making a short-term investment, you’re often doing so because you need to have the money at a certain time. If you’re saving for a down payment on a house or a wedding, for example, the money must be at the ready. Short-term investments are those you make for less than three years.

If you have a longer time horizon – at least three to five years (and even longer is better) – you can look at investments such as stocks. Stocks offer the potential for much higher returns. The stock market has historically risen an average of 10 percent annually over long periods – but it has proven to be quite volatile. So the longer time horizon gives you the ability to ride out the ups and downs of the stock market.

Exploring Short-Term Investments

Appropriate investment types include money market funds, certificates of deposit (CD), bond funds that invest in short-term bonds, and bonds with maturities of three years or less if you have a savings goal of three years or less. Long-term options, such as stocks and stock mutual funds, carry too much market risk for the short term.

Investing in stock mutual funds is too risky if you think you may need your money within three years. Any prolonged period of declining prices can cause you to end up with less principal than the original amount you invested. Declining prices occur during a bear market.


Investing for short- and long-term goals

When investing in a fund that contains a mix of stocks and bonds, there will be more risk when you own a bigger percentage of stocks. Stocks are typically more volatile, while the bond market is usually more of a moderate risk.

But you shouldn't let the risk scare you, argues McLay: "If your goal is beyond two years, you can weather the ups and downs of the market."

Knowing this, you can put your money into different buckets based on how far away each goal is and how much risk you're willing to take. Investing for medium-term goals (six to 10 years) should be less risky than investing for retirement (more than 10 years away).

Todd provides the following outline as a guide:

Immediate term (zero to two years)

Keep cash savings in an accessible savings account for any life milestones coming up in the next two years. This way, explains Todd, you are not stuck waiting for the movements of the stock market to work in your favor. You can access your money at any time, without worrying about extra tax paperwork or what the market's returns will be. Using a high-yield savings account with interest rates around 1% is not going to earn you the largest return possible, but you should feel comfortable knowing your money is in a stable, FDIC-insured account.

Short term (three to five years)

If you know you are going to need your money in three to five years, consider investing it in the stock market — but more conservatively.  "You want to keep at least 40% of your portfolio in bonds," explains Todd.

Medium term (six to 10 years)

"You still want to be somewhat conservative with investing for goals in this time period. But you want to step up the risk a bit in order to improve returns," Todd says. 

Todd typically recommends an investment fund comprising of at least 75% stocks for goals in this time frame. Having a portfolio with 25% in bonds helps to mitigate the risk a bit while still helping you aim for higher returns. 

Long term (more than 10 years)

"Long term goals, like retirement, require an aggressive allocation, meaning a minimum of 90% in stocks," says Todd, who explains that the stock market has historically doubled every seven to 10 years.

To make the most of your long-term investments, you need to go heavy on the stocks," she explains.

Day and Trend Trading

When people follow short-term trends in the stock market and buy and sell accordingly, it is called trend trading. They look at the chart of a particular stock, and they pay attention to the ups and downs of this chart. When the chart starts to show an upswing, that’s when these people buy, and when the upswing is almost over, these people sell. When people buy and sell in the same day, then it is referred to as day trading.

For example, say a particular stock drops down to $13.23 per share at 11:15 am and then begins to climb to $13.54 at 11:30 am, and $14.02 at 11:45 am. Trend traders will pick up on this and proceed to purchase the stock. Say such a trend trader purchased 100 shares at $14.02 at 11:45 am. This trend trader then proceeds to keep a close eye on this stock. He watches the stock as it grows during the day. It is still growing when the market closes, so this trend trader holds on to his shares overnight. Then when the market opens up again the next day, he is again closely watching this stock. He sees the stock prices go up a little more: $15.23 at 10:00 am and $15.24 at 10:15 am. Then he sees the stock price drop a little: $15.21 at 10:30 am. He is seeing a break in the upward trend of this stock. He then proceeds to sell. He sells his 100 shares for $15.21 at 10:30 am.

How much did he make? He spent $14.02 * 100 = $1,402 to purchase these stocks, and then he earned $15.23 * 100 = $1,523 when he sold his stocks. His earnings minus his purchase amount is $1,523 – $1,402 = $121. Subtracting his trading fees of $14, he made a total profit of $121 – $14 = $107. Not bad for a day’s worth of following the trend.

The 10 Best Short-Term Investment Strategies for 2022

Looking for the best investments for 2022 and beyond? Here are ten of the best short-term investment strategies that provide fast, lucrative returns with low risk:

  1. Savings Accounts

  2. Corporate Bond Funds

  3. Government Bond Funds

  4. Treasury Securities

  5. Money Market Accounts

  6. Certificates of Deposit

  7. Cash Management Accounts

  8. Peer-to-Peer Lending

  9. Roth IRA

  10. Rewards Checking Accounts

1. Savings Accounts

You might not have thought about a savings account as one of the best short-term investments, but it is. Think about it like this: when you put your money in a bank account, you’re basically giving a loan to the bank. That’s why you’ll earn interest on your accounts. A savings account can be a good short-term investment option if you’re going to hold a large amount of money in savings for 1 to 5 years.

Unfortunately, the average savings account yields a very small amount of interest. However, you could always open up a high-yield savings account and earn substantially higher interest.

A high-yield savings account is a type of savings account that typically yields 20 to 25 times the interest that a regular savings account does. It’s a great option if you’re:

  • Saving for vacation

  • Saving for a large purchase (like an automobile)

  • Putting money away for emergency funds

If you’re going to have money sitting in the bank account for a prolonged period, why not earn as much interest as you can?

A high-yield savings account might not have all the features that come with a standard savings account. In fact, online banks and credit unions typically offer savings accounts with the highest rates, which forces some people to hold their checking and savings accounts at different banking institutions. Thankfully, it’s easier than ever to make online transfers between different institutions.

It should also be noted that high-yield savings accounts often require that you make a higher minimum deposit and that you maintain a higher minimum balance.

2. Corporate Bond Funds

A corporate bond is a type of debt security that’s sold to investors and the second on our list of the best short-term investments. Large companies issue them to raise money for any number of purposes.

You might be asking yourself, “What’s the difference between a corporate bond and a corporate stock?” A stock is a share of the company that gives the investor a small degree of ownership. The investor receives dividends on the stock, and the stock may experience a rise or fall in value depending upon the company’s success.

A corporate bond is more similar to a loan. The company will pay back the investor for the amount paid, and there’s usually a pre-established interest rate and maturity date.

A corporate bond is considered a safer investment than a stock because the investor will most likely get his or her money back, plus interest. Stocks are riskier because they may never increase significantly in value, and there’s no clear indication of the best time to sell the stock.

A corporate bond is only at risk if the company collapses. But even so, the company’s assets are typically used as collateral so there’s a better chance your losses would be reimbursed. So far as short-term investing goes, you can find corporate bonds that mature in three years or less.

3. Government Bond Funds

A government bond is similar to a corporate bond, but it’s issued by the government rather than a corporation. Like a corporate bond, a government bond is considered a low-risk investment. In fact, government bonds issued by the U.S. Treasury are considered to be some of the safest bonds in the world and among the best short-term investments.

Because of their low risk, government bonds typically pay low interest rates. However, they’re optimal because they’re exempt from state and local taxes (bonds from foreign governments are not), and you can even find government bonds that pay interest periodically rather than at the maturity date.

Here’s the icing on the cake: you can take great pride investing in government bonds. Most government bonds are used to fund helpful domestic programs, infrastructure projects, parks, and an array of other public services. They’re a feel-good investment for the patriotic investor.

4. Treasury Securities

We mentioned treasury bonds in the last section, but two other types of treasury securities are equally safe and desirable. The differences lie mostly in the range of maturities.

The T-Bill has the shortest maturity range of all the treasury securities. Typically, treasury bills have terms of 4 weeks, 8 weeks, 13 weeks, 26 weeks, or 52 weeks.

T-Notes have maturity terms that range from 2 to 10 years. These securities pay interest semiannually.

T-Bills and T-Notes are arguably the best treasury securities for short-term investing. But you can couple those investments with longer-term treasury bonds and earn short-term, medium-term, and long-term profits.

5. Money Market Accounts

A money market account is a type of bank account that is basically a hybrid between a checking account and a savings account. Unlike a regular savings account, a money market account typically allows you to write checks and use a debit card, and it also offers higher interest. Government regulations limit you to six withdrawals per month.

You might consider opening a money market account if you want to enjoy the flexibility of a checking account with the higher interest of a high-yield savings account. It could also be an optimal bank account if you’re a retiree—you could deposit your retirement funds in the account and use it to pay some bills.

Banks and credit unions offer money market accounts. Like a high-yield savings account, a money market account has stricter requirements than the average savings. But you can have your money market account insured, so it’s a very safe investment.

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6. Certificates of Deposit

6. Certificates of Deposit

A certificate of deposit (CD) is an account in which you deposit a large sum of money and leave it untouched for an extended period of time. In return, you’ll earn a premium interest rate. However, you’ll be charged a penalty for early withdrawal.

The best CD interest rates are much higher than any savings or money market account. It might be a good option for you if you’re saving for an extended period of time—maybe you’re saving for a down payment on a home, or a new car, or a trip around the world. If your money is going to sit in the bank for a long time, you might as well get as much interest as possible and boost your earnings.

CD terms vary, and you’ll find ones that range from 6 months to 18 months, or even longer. Most CD terms fall within the short-term investing range. So long as you’re disciplined with your money and don’t make an early withdrawal, a CD can be a great way to put your savings fund to work for you.

7. Cash Management Accounts

A cash management account is an account that’s offered by an institution other than a bank or credit union. They’re mostly issued by brokerage firms.

Most cash management accounts are similar to the standard checking account: they come with a debit card, a checkbook, and online bill payment services. And they usually offer higher interest than the standard checking account.

Cash management accounts are really only helpful if you’re an investor and have already opened an account with a brokerage firm. If you’re making investing a significant part of your income, you’ll enjoy being able to manage your personal finances and your investment accounts at a single institution. And when it’s time to file taxes, you’ll have fewer statements and documents to gather.

Furthermore, most cash management accounts have services that will help you maximize the profitability of your investments and manage your investment cash flow.

8. Peer-to-Peer Lending

Peer-to-peer lending is when an individual takes a loan from another individual—no middleman involved. P2P lending is also known as “social lending” and “crowdlending,” and it’s a relatively new type of investment opportunity that’s only existed (in a formal capacity) since 2005. There are many websites that facilitate P2P lending.

You’ll open an account with a P2P lending site and deposit a sum of money that’ll be used in your loans. Loan applicants create their own profile and will get matched up with you. Most P2P lending sites are fairly good at assigning some kind of “risk rating” to an applicant that can help you determine which loans are best for you to grant.

A P2P account may be a good alternative to a savings account because it usually generates higher interest. There is, of course, a risk of default so you should choose your applicant carefully and reevaluate your risk tolerance before you grant a loan.

For short-term investing, try and grant loans that mature within 5 years.

9. Roth IRA

A Roth IRA is a type of individual retirement account (IRA) that’s used to hold retirement funds. With a traditional IRA, your contributions are tax-deductible, but you’ll pay taxes when you start making withdrawals. A Roth IRA is the opposite: you pay taxes on your contributions, but your withdrawals are tax-free.

A Roth IRA is generally considered a better retirement account than a traditional IRA. Sure, you’ll have to pay more taxes with each contribution. But when you finally reach retirement age, you won’t have to pay anything on your withdrawals. It could lessen your financial burden during retirement.

Roth IRAs don’t pay simple interest. But if you open your Roth IRA at a brokerage firm in which you have investments, your account can earn compound interest based on the interest and dividends of your investments. This is a great way to significantly boost your retirement funds if you’re an investor.

While a retirement account is generally a long-term investment, you can increase your account earnings in the short-term by maintaining a Roth IRA at your brokerage firm.

10. Rewards Checking Accounts

Not all checking accounts are made the same. Some of the lucrative checking accounts you’ll find include:

  • Interest-Bearing Checking Accounts: These typically have a high minimum balance requirement, but they generate high interest.

  • Premium Accounts: Premium checking accounts also require a high minimum balance, but they’ll typically offer some worthwhile services (financial advice or discounts) or rewards points you can redeem for products and services. Some of these discounts and rewards can save you lots of money. And saving is earning, isn’t it?

Best investments for short-term money

When you need the money Investment options Potential interest rate Risk
A year or less High-yield savings and money market accounts, cash management accounts Around 1.2 percent Low risk and accounts are backed by the FDIC.
Two to three years Treasurys and bond funds, CDs 2.5+ percent Bank products and Treasurys are safest, corporate bond funds slightly less so.
Three to five years (or more) CDs, bonds and bond funds, and even stocks for longer periods 3.0+ percent (or much more if you’re investing in stocks) CDs and bonds are relatively low risk compared to stocks, which can fluctuate a lot and are high risk.

The Bottom Line

Short-term trading uses many methods and tools to make money. The catch is that you need to educate yourself on how to apply the tools to achieve success. As you learn more about short-term trading, you'll find yourself drawn to one strategy or another before settling on the right mix for your particular tendencies and risk appetite. The goal of any trading strategy is to keep losses at a minimum and profits at a maximum, and this is no different for short-term trading.