If you’ve got cash to invest, but you need it in the next 5 years, then you may be considering short term investments. With interest rates at an all time low and inflation running high, many of us are looking 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.”
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.
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.
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:
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.|
If you do want to invest in equities for a short period, here are some strategies you can take to minimise your risk:
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.
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.
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:
If you want to start short term investing then here are some suggested steps:
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.
There are several options for investing in short term investments. Here are some ways to start investing:
Here are some of the pros and cons of short term versus long term investing.
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.
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.
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