Concerns about inflation, interest rates and global geopolitical uncertainty can make you nervous about your money. Are your retirement savings protected in the event of a stock market downturn or a prolonged economic downturn? Believe it or not, there are little-known short-term investments that can increase the rewards and reduce the risk of growing your money during tough times, while giving you the opportunity to reinvest when the economy improves.
Investing is a double-edged sword
Inflation and market volatility make having a diversified investment strategy critical to long-term financial success. By investing in the stock market and other options, you can get the leverage you need to weather market downturns. Any type of investment is a double-edged sword. If you get out of the market and out of the money, inflation will suck the life out of your money. And if you use everything you have in a down market, you can increase your losses.
Don’t sit on the sidelines out of fear
Many investors are sitting on the sidelines. This is something we haven’t seen since the Great Recession. People are confused. In a low-inflation environment, sitting on the sidelines in any currency may work, but at an inflation rate of around 8%, people are need to find other ways to increase their wealth. Sitting in cash guarantees that your dollar will lose value based on the rate of inflation. There is a place to “put” your money, get safe returns and help fight inflation. One of the keys to retirement planning is making sure your dollars are appreciating.
Here are some short-term investment options
Series I stock bonds (opens in a new tab) is a low-risk savings product purchased directly from the government, backed by the US Treasury Department and designed to protect against inflation. The product is determined by the fixed rate, which remains the same as the life of the bond, and the rate of inflation, which is based on the consumer price index (CPI). Twice a year the Treasury sets the new inflation rate for the next six months. Series I bonds are intended as long-term investments, but due to high inflation, they can be used very well in the short term.
Be careful, because rates change, it’s important to understand how long you plan to invest in a Series I bond to make it a viable short-term investment. You can pay off the I bond after one year, but there will be a penalty equal to the last three months of interest if you pay within the first five years.
Interest is exempt from state and local taxes, and you can defer federal taxes until you pay taxes in the year you earn the bonds. Working with an experienced professional can help you understand the effective results you can get if you plan to withdraw your money within two years.
T-bills (opens in a new tab) is a short-term investment backed by the government with terms ranging from four weeks to 52 weeks. They are considered one of the safest investments in the world. T-bills are sold at a discount or at cost. You are paid for the invoice amount at maturity.
The interest paid is simple interest, meaning you only earn money on the deposit, and you don’t earn that interest until it matures. You can hold a bill until maturity, or you can sell it before maturity. Although there is no penalty for selling a T-bill early, you may not get back all of the money you invested. If you sell when the interest rate rises, you will have a loss, because the new T-bill can be bought at a better price than yours.
You can also sell at a profit if the T-bills fall after your purchase. Often, when you buy a treasury or bond, you get a better yield the longer the maturity. But because of yield volatility, long-term rates such as five-year bonds currently pay less than short-term bonds, such as one-year and three-year bonds. Currently, T-bills are paying more than the historical average.
A fixed annuity is like a CD, a short-term guaranteed investment designed to deposit money until the maturity date. Fixed rate loans offer guaranteed interest rates for one to 10 years, with no fees, compound interest and the ability to write off the benefits each year or let them compound. Today, three-year and five-year annuities pay more than historical averages and make the most sense for money value.
You can also look at short-term fixed index annuities (five years) that allow you to invest in equities with index funds such as the S&P 500. The beauty is that you can invest in an index with the flexibility -only go up with great security. Pay attention to the contribution rate that determines how much profit you can keep.
Fixed-index annuities also guaranteed a fixed account with a higher payout than T-bills with the ability to convert from a fixed account to an indexed annuity every year. Therefore, you can fill T-bills in fixed accounts during periods of volatility and reinvest in the market with the index funds provided to increase the potential yield.
You can also mix and match by having some money in a fixed account and some in an index account. If you’re looking for a higher yield than a T-bill or fixed annuity, short-term fixed income funds can be a better solution than market volatility.
Diversification is the key to any successful financial plan, whether you are investing for the short term or the long term. Series I stock bonds, Treasury bills and fixed annuities are paying more than historical averages today.
Each investment has its own advantages, but now is the time to sit down with an experienced financial advisor, review your investment strategy and find out what combination is best for you to beat the market. during the rising cost of living for you.
This article was written by and represents the opinion of our contributing advisors, not the Kiplinger editorial staff. You can see the SEC rate in the chart if you are close to the selected date (opens in a new tab) or with FINRA (opens in a new tab).