Investing is often viewed as a long-haul journey. However, not all investments require you to lock your money away for years or decades. Welcome to the world of short-term securities! These financial instruments can offer flexibility, lower risk, and quicker returns compared to long-term investments like stocks, real estate, or mutual funds.
Short-Term vs. Long-Term: What’s the Difference?
The primary difference between short-term and long-term investments is the time horizon. Short-term investments typically mature in three years or less, whereas long-term investments can take more years or even decades. Both can play a role in achieving your financial plan’s goals.
Why Consider Short-Term Securities?
Liquidity: You can easily convert your investments into cash without losing value.
Lower risk: You have reduced exposure to market volatility.
Flexibility: Short-term securities can be good for parking funds you’ll need soon.
The Downsides
Lower returns: Generally, short-term securities offer lower returns than long-term investments.
Interest rate sensitivity: Some short-term securities may not offer a fixed return, making them susceptible to interest rate fluctuations.
Inflation risk: The returns may not always outpace inflation, effectively reducing your purchasing power over time.
A Closer Look at Types of Short-Term Securities
Certificates of deposit (CDs) are deposit accounts in which the bank holds your money for a certain period.
Pros:
Fixed interest rates.
Guaranteed returns.
Insured up to $250,000 when held by an FDIC-insured bank or NCUA-insured credit union.
Cons:
Penalties for early withdrawal.
Typically, higher minimum investment requirements.
Money market accounts are a type of savings account offering advantages such as check writing.
Pros:
Higher interest rates compared to regular savings accounts.
Insured when held by an FDIC bank or NCUA credit union.
Money is generally accessible at any time.
Cons:
Limited transactions per month.
May require a higher minimum balance.
Treasuries are debt securities issued by the U.S. government to fund operations and other spending. In terms of short-term investing, we generally mean Treasury notes and bills.
Pros:
Low risk, as they are backed by the U.S. government.
Generally exempt from state and local taxes.
Cons:
Lower returns.
Minimum investment can be higher.
Can be sensitive to interest rates.
Final Thoughts
Short-term securities offer an excellent avenue for investors looking for lower risk, more liquidity, and a quicker return on investment. However, the trade-off often comes in lower returns and some exposure to inflation and interest rate risks. Your choice of CDs, money market accounts, and Treasuries should be based on your needs, financial goals, and risk tolerance.
To navigate through the plethora of investment options, you may find it beneficial to work with a fiduciary financial advisor. A fiduciary works in your best interest and can provide unbiased advice tailored to meet your financial objectives.
Schedule a complimentary consultation with one of our fiduciary financial planners to discuss your personal situation.
This material was written in collaboration with artificial intelligence (ChatGPT) derived from sources believed to be accurate. This information should not be construed as investment, tax, or legal advice.