Stock investing for dummies
Right now, the market is at all time highs, and at some point in the future, it will inevitably pull back.
If you’re a young investor and don’t want to see an immediate decline in your portfolio, now’s a good time to consider short term investment options. Short term investments typically don’t see the growth of longer term investments, but that’s because they are designed with safety and a short amount of time in mind.
However, millennials honestly haven’t experienced a prolonged bear or flat market. While the Great Recession was tough, millennials have seen their net worth’s grow. However, in periods of uncertainty, it can make sense to invest in short term investments.
Also, for millennials who may be looking at life events in the near future (such as buying a house or having a baby), having short term investments that are much less likely to lose value could make a lot of sense.
If you’re a young investor looking for a place to stash some cash for the short term, here are ten of the best ways to do it.
1. Online Checking and Savings Accounts
Online checking and savings accounts are one of the best short term investments for several reasons:
- They have higher interest rates than traditional accounts
- They are completely safe: your accounts are FDIC insured up to $250,000
- You can access your money any time and don’t have to worry about losing interest as a result
However, to get the very best rates from online checking and savings account, you typically have to do one of the following:
- Contribute a certain amount to the account (say $10,000 minimum)
- Sign up for direct deposit into the account
- Use your debit card for a certain number of transactions each month
If you’re going to be doing those types of transactions anyway, signing up for one of these accounts can make a lot of sense. And to make these accounts even more attractive, interest rates have been rising the last few months making yields go higher.
Check out these top offers:
2. Money Market Accounts
Money market accounts are very similar to online savings accounts, with one exception. Money market accounts typically aren’t FDIC insured. As a result, you actually can earn a little higher interest rate on the account versus a typical savings account.
Money market accounts typically have account minimums that you have to consider as well, especially if you want to earn the best rate.
You can sign up for a good online money market account at Discover Bank.
3. Certificates Of Deposit (CDs)
Certificate of deposits (CDs) are the next best place that you can stash money as a short term investment. CDs are bank products that require you to keep the money in the account for the term listed – anywhere from 90 days to 5 years. In exchange for locking your money up for that time, the bank will pay you a higher interest rate than you would normally receive in a savings account.
The great thing about CDs is that they are also FDIC insured to the current limit of $250,000. If you want to get fancy and you have more than $250,000, you can also sign up for CDARS, which allows you to save millions in CDs and have them insured.
4. Short Term Bond Funds
Moving away from banking products and into investment products, another area that you may consider is investing in short term bonds. These are bonds that have maturities of less than one year, which makes them less susceptible to interest rate hikes and stock market events. It doesn’t mean they won’t lose value, but they typically move less in price than longer maturity bonds.
There are three key categories for bonds:
- U.S. Government Issued Bonds
- Corporate Bonds
- Municipal Bonds
With government bonds, you’re repayment is backed by the U.S. government, so your risk is minimal. However, with corporate bonds and municipal bonds, your bonds are backed by local cities and companies, which increased the risk significantly.
However, it’s important to note that investing in a bond fund is different than investing in a single bond, and if you invest in a bond fund, your principal can go up or down significantly. Here’s a detailed breakdown of why this happens: Buying a Bond Fund vs. Buying A Single Bond.
If you do want to invest in bonds, you have to do this through a brokerage. The best brokerage I’ve found for both buying individual bonds and bond funds is TD Ameritrade. TD Ameritrade has a bond screener built into it’s platform that makes it really easy to search for individual bonds to buy, and gives you a breakdown of all aspects of the bond.
Also, TD Ameritrade offers a $0 minimum IRA and hundreds of commission-free ETFs.
5. Treasury Inflation Protected Securities (TIPS)
Treasury Inflation Protected Securities (TIPS) are a type of government bond that merits their own section. These are specially designed bonds that adjust for inflation, which makes them suitable for short term investments as well as long term investments. TIPS automatically increase what they pay out in interest based on the current rate of inflation, so if it rises, so does the payout.
What this does for bondholders is protect the price of the bond. In a traditional bond, if interest rates rise, the price of the bond drops, because new investors can buy new bonds at a higher interest rate. But since TIPS adjust for inflation, the price of the bond will not drop as much – giving investors more safety in the short term.
You can invest in TIPS at a discount brokerage like TD Ameritrade. Some of the most common ETFs that invest in TIPs (and are commission-free at TD Ameritrade):
- STPZ – PIMCO 1-5 Year U.S. TIPS Index
- TIP – iShares TIPS Bond ETF
6. Floating Rate Funds
Floating rate funds are a very interesting investment that don’t get discussed very often – but they are a really good (albeit risky) short term investment. Floating rate funds are mutual funds and ETFs that invest in bonds and other debt that have variable interest rates. Most of these funds are invested in short term debt – usually 60 to 90 days – and most of the debt is issued by banks and corporations.
What is a Sweep Account and How Do I Use It?
In times when interest rates are rising, floating rate funds are poised to take advantage of it since they are consistently rolling over bonds in their portfolio every 2-3 months. These funds also tend to pay out good dividends as a result of the underlying bonds in their portfolios.
However, these funds are risky, because many invest via leverage, which means they take on debt to invest in other debt. And most funds also invest in higher risk bonds, seeking higher returns.
If you want to invest in a floating rate fund, you have to do this at a brokerage as well. TD Ameritrade is a great choice for this as well. The most common floating rate funds are:
- FLOT – iShares Floating Rate Bond ETF
- FLRN – Barclay’s Capital Investment Grade Floating Rate ETF
- FLTR – VanEck Vectors Floating Rate ETF
- FLRT – Pacific Asset Enhanced Floating Rate ETF
7. Selling Covered Calls
The last “true” investment strategy that you can use in the short term is to sell covered calls on stocks that you already own. When you sell a call on a stock you own, another investor pays you a premium for the right to buy your stock at a given price. If the stock never reaches that price by expiration, you simply keep the premium and move on. However, if the stock does reach that price, you’re forced to sell your shares at that price.
In flat or declining markets, selling covered calls can make sense because you can potentially earn extra cash, while having little risk that you’ll have to sell your shares. Even if you do sell, you may be happy with the price received anyway.
To invest in options, you need a discount brokerage that supports this. TD Ameritrade has some of the best options trading tools available through their ThinkorSwim platform.
8. Pay Off Student Loan Debt
Do you want a guaranteed return on your money over the short run? Well, the best guaranteed return you can get is paying off your student loan debt. Typical student loan debt interest rates vary from 4-8%, with many Federal loans at 6.8%. If you simply pay off your debt, you can see an instant return on your money of 6.8% or more, depending on your interest rate.
Maybe you can’t afford to pay it all off right now. Well, you could still look at refinancing your debt to get a lower interest rate and save some money.
We recommend Credible to compare student loan refinancing options and see if it makes sense to refinance. You can do it in 2 minutes right here:
9. Pay Off Credit Card Debt
Similar to getting out of student loan debt, if you pay off your credit card debt you can see an instant return on your money. This is a great way to use some cash to help yourself in the short term.
There are very few investments that can equal the return of paying off credit card debt. With the average interest rate on credit card debt over 12%, you’ll be lucky to match that in the stock market once in your life. So, if you have the cash to spare, pay down your credit card debt as quickly as possible.
If you’re struggling to figure out a way out of credit card debt, we recommend first deciding on an approach, and then using the right tool to get out of debt.
For the approach, you can choose between the debt snowball and debt avalanche. Once you have a method, you can look at tools.
First, you need to get financially organized. Use a free tool like Personal Capital to get started. You can link all your accounts and see where you stand financially.
Next, consider either:
- Balance Transfer: If you can qualify for a balance transfer credit card, you have the potential to save money. Many cards offer a promotional 0% balance transfer for a set period of time, so this can save you interest on your credit card debt while you work to pay it off.
- Personal Loan: This may sound counter-intuitive, but most personal loans are actually used to consolidate and manage credit card debt. By getting a new personal loan at a low rate, you can use that money to pay off all your other cards. Now you have just one payment to make. Compare personal loans at Credible here.
10. Peer To Peer Lending
Finally, you could invest in peer to peer loans through companies like Lending Club and Prosper. These aren’t completely short term investments – many loans are for 1-3 years, with some longer loans now available. However, that is shorter than what you’d traditionally want to invest for in the stock market.
With peer to peer lending, you get a higher return on your investment, but there is the risk that the borrower won’t pay back the loan, causing you to lose money. Many smart peer to peer lenders spread out their money across a large amount of loans. Instead of investing $1,000 in just one loan, they many invest $50 per loan across 20 different loans. That way, if one loan fails, they still have 19 other loans to make up the difference.
One of the great aspects of peer to peer lending is that you get paid monthly on these loans, and the payments are a combination of principal and interest. So, after several months, you’ll typically have enough to invest in more loans immediately, thereby increasing your potential return.
We are huge fans of Lending Club, and you can sign up for Lending Club here.
Do you use any of these strategies when it comes to short term investing?
– stock investing for dummies