Short term investments

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.”

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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:

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.
• Research your investment options. You could invest through a stocks and shares ISA, a share trading account or a traditional bank or building society.

Where can I find help on short term investments?

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:

• Bank or building society account
• Stocks and shares ISA
• Share trading account

Pros and cons

Here are some of the pros and cons of short term versus long term investing.

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

• How long can I hold short term investments for?

  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.

• What are 3 short term investments?

  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.

• Is short term investing worth it?

  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.

• Is short term investment profitable?

  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.

• Where can I invest my money for 1 month?

  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.