Best Short Term High Yield Investments

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Contributor, Benzinga
February 3, 2023

The majority of investors have a long-term focus, with the objective of growing wealth sustainably over many decades. A common example is investing for retirement. To accomplish this objective, investors may buy and hold a diversified portfolio of stocks and bonds or use mutual funds and exchange-traded funds (ETFs). 

Some investors have more short-term-oriented goals. These can include near-future plans like making a down payment, buying a new car or paying tuition. While traditional methods like savings accounts can do the trick, the yield they pay isn't competitive. But there are alternatives.

Thanks to rising interest rates, many short-term investments are now paying competitive yields that were previously found only in dividend stocks and real estate investment trusts (REITs) a few years earlier. If you're hungry for yield over the short term, say the next year or so, then this guide is for you. 

The Best Short-Term High-Yield Investments

The best short-term high-yield investments should have the following qualities:

  1. Safety of principal: Ideally, your investment should have a low risk of losing value or being wiped out entirely. Be sure to read the fine print for each investment and be wary of those with excessively high yields – they may be a Ponzi scheme.
  2. High liquidity: You should be able to sell your investment easily without incurring a penalty or being outright prohibited because of a lock-up period. 
  3. High yield: If you're looking for higher-than-average yields, your investment should have a yield at or higher than the current U.S. Fed Funds Rate target range

Here are four possible choices for short-term high-yield investments:

Certificates of Deposit 

Banks and other financial institutions offer certificates of deposit (CDs), which are savings products that guarantee the safety of your principal and a fixed annual rate of interest. Investors who buy CDs commit to having their investment locked up for a period of time that they can choose. During this time, they receive periodic interest payments. Once the CD matures, the investor gets their initial investment back. 

As bank savings products, CDs are insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA) for up to $250,000 per institution, making them as safe as it gets. To use CDs as a short-term high-yield investment, consider buying ones that have terms of one or two years. Investors who shop around can find some great promotional CD rates on offer. 

Money Market Funds

Investors looking for a high-yield short-term investment in a brokerage account can consider money market mutual funds. These funds should not be confused with money market accounts, which are bank savings products. Money market mutual funds are investment products that try to maintain a stable net asset value (NAV), typically fixed at $1 while paying periodic interest.

An example is the Vanguard Federal Money Market Fund (VMFXX), which currently pays a 30-day U.S. Securities and Exchange Commission (SEC) yield of 4.3% and a compound yield of 4.39%. The fund invests primarily in U.S. government securities and repurchase agreements. Keep in mind that while money market funds are low risk, they are not risk-free. Historically, some have lost value briefly during major market crashes like 2008. 

Short-Term Corporate Bond ETFs

Investors willing to take on higher credit and interest rate risk can buy exchange-traded funds (ETFs) that hold portfolios of short-term corporate bonds. An example is the Vanguard Short-Term Corporate Bond ETF (NYSEARCA: VCSH), which holds 2,360 bonds issued by U.S. companies with an average maturity of 3 years. The majority of these bonds are rated A and BBB by S&P Global.

Short-term corporate bond ETFs have more volatility than money market funds. When markets crash, they can lose value too. When interest rise, they can also lose value. However, they make up for it with a higher yield. For example, VCSH currently has a yield-to-maturity of 5.2%. These ETFs also have excellent liquidity, making it easy for investors to buy and sell as they wish. 

High-Yield Savings Account 

If liquidity and safety of principal are paramount, then a high-yield savings account (HYSA) may be best. These versions of regular savings accounts are offered by banks and credit unions and pay a much higher interest rate. They may not yield as much as a CD, but you can access your money whenever you need it. Like CDs, HYSAs are also insured by the FDIC and NUSA, so there's virtually no risk of loss.

When opening an HYSA, investors may be able to find better deals at online-only banks, especially if they are offering a promotional rate. Before opening an HYSA account, investors should closely read the fine print, especially when it comes to minimum account balances, transaction limits, monthly maintenance fees or charges for ATM use. 

Peer-to-Peer Lending

Investors willing to seek the highest yields possible for a short-term investment can consider peer-to-peer (P2P) lending. P2P platforms connect prospective lenders to borrowers. The yield earned will vary depending on the riskiness of the loan. In general, P2P lending is far risker compared to savings accounts or corporate bonds but offers higher yields. 

Depending on the creditworthiness of the person you are lending to, the risk of default can be fairly high. By engaging in P2P lending, investors are effectively loaning strangers money. The P2P platform is there to facilitate the process and cannot guarantee your money back if the borrower defaults. Prospective P2P lending investors should also ensure the platform they use is credible and trustworthy. 

Why Choose a Short-Term Investment?

Investment selection should be tailored to an investor's objectives, time horizon and risk tolerance. For those needing money in the near future and looking to minimize potential losses, short-term investments are ideal. Here are some more reasons why investors may choose a short-term investment.

Safety of principal: Very few investments are risk-free, but short-term investments tend to have much lower volatility. Some short-term investments like HYSAs and CDs come insured up to a certain amount. 

Liquidity: With the exception of CDs, most short-term investments can be sold whenever the investor wants. Investors who value access to their cash when they need it may prefer short-term investments. 

Steady income: Many short-term investments pay out interest on a monthly basis. Regular cash can be beneficial for investors who rely on these interest payments to fund their lifestyle or pay bills. 

Can You Replace Your Income With High-Yield Investments?

For many people, the ultimate goal of investing is to be financially free. Often, this means living off the income generated by a well-performing, sufficiently large portfolio.

Theoretically, an investor could replace their income with short-term high-yield investments, but there are some caveats that make this unrealistic for the average investor.

For example, an investor with $2 million saved could put it all into a three-year CD paying an annual percentage yield (APY) of 4.5%. Every year, this investor would receive $90,000 in interest, which after tax is enough to live off comfortably in most cases. The problem is that very few investors have $2,000,000 lying around to throw into a CD. 

If you're gainfully employed, investing for the long term may be better. This process means maximizing savings rates, consistently contributing to investments and maintaining a diversified portfolio of stocks, bonds and cash tailored to your time horizon and risk tolerance. 

Frequently Asked Questions

Q

What is the best short-term investment right now?

A

There isn’t a definitive answer to what is the best short-term high yield investment right now. The answer to this question will depend on an investor’s objectives and risk tolerance. For example, those looking for absolute safety and ready access to their money may prefer an HYSA. Investors who prefer safety but are willing to lock up their money for a higher yield might buy a CD. Investors in a brokerage account can choose between money market funds and short-term corporate bonds depending on whether they favor minimal volatility or higher yields respectively. 

Q

How do I invest $100,000 in the short term?

A

Before investing a large sum like $100,000 in the short-term, investors should answer a few questions. First, determine your time horizon (e.g., “when will I need the money?”). This process will help you determine whether to keep it in a liquid investment (like an HYSA) or an illiquid one with a lock-up (like a CD). Next, determine your risk tolerance (e.g., “am I prepared to potentially lose some or all of my investment?”). If the answer is no, an insured product like a HYSA or CD might be ideal. If you’re willing to accept greater risk for higher yields, then short-term corporate bonds or even peer-to-peer lending could be options. Finally, once you have these considerations figured out, shop around for the best deals, read the fine print and monitor your investments periodically.