Best Investments for the Short-Term and Long-Term
A recent survey found that close to half of all adult Americans are not investing their money. Some simply don’t have the cash to invest, others have been scared away by stories of investors who lost it all.
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Ignorance and fear are two of the biggest factors keeping over half of America’s financially independent population from investing their money. In this guide, we’ll try to change that, looking at investments from a practical perspective and providing candid insight into this sometimes scary and often confusing world.
We’ll show you the best short-term and long-term investments to consider based on your financial situation, proving you can protect your money and your future without having Wolf of Wolf Street levels of confidence and tenacity.
Your Capital is at Risk
The first thing you need to know before you invest is that your capital is at risk. But you probably already knew that, as this statement is plastered across every trading site, commercial, and banner ad. It’s the trading equivalent of “terms and conditions” apply.
This means exactly what it says: Every time you invest your money, that money is at risk. This statement can confuse and concern investors, but there are a few important takeaways here:
Only Your Capital at Risk
The above statement has been misconstrued to mean that, somehow, all your assets are at risk when you invest. There is a certain sense of naivety concerning the stock market and other major investments. People hear stories of investors who lost their homes and everything else and they start believing that if investments go wrong, you can lose everything.
This is true if you invest everything. It’s true if you start chasing your losses by refinancing your home or you risk more than you should to begin with. However, if you take $1,000 out of your bank account and use this to buy $1,000 worth of shares, the most you can lose is $1,000.
It’s as simple as that. There are exceptions, of course, such as when you’re investing in a business and making an agreement to continue funding that business, but in the majority of cases, you will only lose what you invest and this is what the “your capital is at risk” statement means. Your capital, in this sense, refers to the money you invest, not all the money you own.
This Statement is Mandatory
Just like the “terms and conditions” apply statement, the “your capital is at risk” statement is often a legal requirement. It’s not there to foreshadow your imminent downfall, it’s there because the regulators require it.
If you stick with measured investments, don’t risk more than you can afford, and take it easy, there’s no reason to fear losing everything you invest. The stock market may crash, the company you invest in may go bust, but stock markets bounce back, blue-chip companies rarely go bust, and investors can make a reliable and stable profit if they make sensible decisions and have reasonable expectations.
The Best Short-Term Investments
Also known as temporary investments and marketable securities, a short-term investment is one that can be liquidated quickly and is designed to last for less than 5-years.
It’s not, as you might expect, an investment that will secure a return in just a few months. There are very few investments that can generate a worthwhile return in such a short space of time. You need patience as an investor, but the good news is that you don’t need to wait the full 5-years to see the benefits and your money will start growing after just a year.
We’ll discuss how much you should devote to short-term investments a little further down, but first, let’s look at the best temporary investments.
An Online Savings Account
A simple but effective way to save your money, especially if you’re hit with a sudden windfall and want to keep it safe.
Online savings accounts don’t pay high-interest rates. It’s a trifling sum at best. But your money will be kept safe, it will be easy to access if you ever need it, and if you keep it for 4 or 5 years that trifling sum can generate substantial earnings.
The best online savings accounts pay upwards of 1.5% and tend to be capped at around 2%. If you receive a windfall of $50,000 and add it to one of these accounts along with a $500 monthly contribution, you will have saved in excess of $86,000 over 5 years, $6,000 of which is interest.
Exchange-Traded Funds (ETFs)
An ETF is a collection of securities that trade on an exchange. It can include stocks, commodities, and bonds and it can be based in the US or abroad. These funds are a great way to create a diverse portfolio with a single investment, as they contain multiple investments.
What’s more, if you look at global ETFs over the last 10 years, you’ll notice a stable upwards trend, with growth triggered every single year and predictions for more growth to come. Of course, if there is a global stock market crash then these funds will suffer heavily, but such crashes are rare and when they have occurred in recent years they have often bounced back.
Lending circles connect borrowers (individuals, companies) with lenders (anyone with money to spare). The former pays a fixed interest rate based on how much they lend; the latter can earn extra cash from their savings.
These sites work because they provide a win-win for both parties. The borrowers can find better rates than they would be charged by the banks and credit unions, while the lenders can make more money than they would make on a simple savings account. This rate can be anywhere from 3% to 8% and will depend on the site and the situation.
One of the best options is Lending Club, which connects you with both businesses and individuals and allows you to make a start with a very low minimum deposit. Worthy Bonds does something similar, offering lenders a fixed 5% rate of interest when they lend money to small businesses.
Pay Off Debt
It’s not an investment strategy as such, but hear us out, but your debt could be costing you more than an investment will ever earn. If you have any high-interest debt, such as credit cards, personal loans, and other unsecured debts, you could be paying an APR of between 10% and 25%, which may cost you thousands of dollars in a single year.
A dollar saved is a dollar earned, as the saying goes. The average debt payments are anywhere from $300 to $400 a month, most of which is tied to interest, with only a fraction of that going towards the principal. If you increase your monthly payments, putting your “investment” money towards your debt instead of stocks or savings, you can clear that principal in full and give yourself an extra $300 to $400 every month.
That’s a bigger and more immediate saving than any savings account or stock can provide you with, yet this is something that countless debtors refuse to accept. They don’t see their $10,000 debt as something that will cost them a total of $15,000 to $20,000 and seriously impact their net worth. They focus only on the three or four-hundred dollars that leaves their account every month.
Use debt payoff strategies like Debt Avalanche and Debt Snowball to clear these debts quickly. Any money that would have gone to investments and savings should go towards these debts, and once they clear you’ll have more cash in your account to invest with every month.
How Much Should You Invest Short-Term?
Any financial expert will tell you to invest at least 10% of your income. However, this isn’t always practical. To understand why, let’s take a look at some estimated averages over the course of a single month.
- Wage: $3,500
- Mortgage Payment: $1,050
- Debt Payment: $350
- Student Loan Payment: $250
- Car Payment: $400
- Utility Bills: $120
- Food Bills: $350
Based on the above figures, the average consumer may have just $980 left at the end of the month. Once you consider clothing, subscriptions, and tax, that could drop to as little as $300. Based on the 10% rule, they would need to invest $350, which is more than they actually have.
If you can meet that 10% target, great. If not, your first goal should be reducing your outgoings, increasing your cash flow, and putting as much as you can afford into your savings.
These issues aside, your goal should be to invest money that you don’t need for debt/bills at the end of the month and won’t need in the future. It’s better to be safe than sorry, investing less than you need now to avoid leaving yourself short in the future.
Many first-time investors are too eager. They run the sums, get excited about the prospect of saving more money for their future, and invest every cent of their discretionary income in the first month or so. A couple of months down the line, they are hit with an unexpected bill and faced with the prospect of cashing their savings or acquiring new debt.
Investing is about gradually improving your financial situation, but if you invest too much and encounter those issues, it will make that situation worse. So, err on the side of caution, invest what you know you won’t miss, and take it easy.
If we refer to the previous averages as an example, you may decide to invest just $100 or $150 of the money you have left. Not only have you covered all bills, debts, and taxes, but you also have between $250 and $300 to keep aside for the following month just in case your car breaks down, your washing machine spins its last cycle, or your paycheck is late.
The Best Long-Term Investments
A long-term investment is one designed to last for at least 10 years and is generally not as accessible as a short-term investment. It’s an investment that can help to grow your net worth, but you also need to be careful concerning how much money you invest as you may face penalties and financial losses if you withdraw anything.
Certificates of Deposit (CD)
Simply put, a CD is a savings account fixed for a predetermined term, ranging from a few months to 5 years. The longer the term, the higher the interest rate will be and the more money the account will generate during its lifetime.
A CD is technically a short-term investment as it’s capped at 5 years. However, it more closely resembles a long-term investment as you’re penalized heavily if you withdraw money before the fixed period has ended.
Stocks are one of the best ways to invest your money, but they are also one of the most misunderstood. Inexperienced investors hear horror stories about traders that lost everything, and they believe that the same thing will happen to them.
However, that doesn’t need to be the case. To simplify things, there are three ways that you can invest in the stock market:
This is where the risk comes in. Penny stocks are shares in smaller companies available for a lot less. There is a great degree of speculation with these companies and their value can rise and fall significantly during a single day of trading. This is generally how many people lose their money, but it’s also how traders go from small investments to massive windfalls.
For instance, if you had invested in companies like Netflix and Apple when they were relatively unknown, you could have secured a huge number of shares for very little money. As soon as those companies became the giants that they are today, those stocks would have been worth a fortune and it’s not unfeasible to think that an investment of just a few thousand could be worth tens of millions.
But these are the exceptions, the outliers. Most companies will go the other way, declaring bankruptcy, going into administration, and costing you every penny of your investment. Penny stocks can be a great way to make a lot of money from nothing, but the same could be said for Roulette and Slot Machines.
You’re here to invest, not to gamble, and if you want to keep your cash safe you should avoid these stocks.
A blue-chip company is a large, stable company operating on a consistent profit and generating a stable income for stockholders in the form of dividends. A dividend is the company’s way of giving back to investors. It’s not something that all companies pay, but you will get them from the bigger and more profitable ones.
Blue-chip stocks are much less likely to fail; they are also subject to less volatility. Of course, it’s not unheard of for big companies to fail, but that’s why it’s important to invest in multiple companies of this nature and not to sink your cash into a single stock.
Day trading involves the constant buying and selling of stocks in large numbers. The traders profit from the smallest of changes in stocks and commodities, winning and losing huge sums of money every hour.
As with penny stocks, there can be a lot of money in day trading, but only if you know what you’re doing, have the capital to invest, and are prepared to take the bad days with the good. It is a terrible idea for inexperienced investors and should be avoided at all costs.
Although they’re not always the best option, long-term bonds can provide a very respectable savings rate when investing over 20 or 30 years, often above 3%. The problem is, that isn’t a great deal more than you can find elsewhere and you will be locked into an investment that could last for several decades.
That’s a huge length of time to invest in anything that doesn’t provide you with easy access to your money. However, if you want to create a fund for your children or your retirement, it’s an option that should be considered.
Real estate is not the best investment when you’re buying a primary residence. It rarely increases above the price of inflation and if you’re using a mortgage to acquire it, you could be repaying over 50% of the debt in interest. As an example, if you acquire a mortgage of $250,000 over a 30-year term, you will repay just under $430,000 with a 4% interest rate.
Assuming you get lucky and the house doubles in value during that time, you will have made your money back and earned a profit, but that profit will be nominal when compared to the money you could have earned by investing that down payment in stocks or a savings account.
However, real estate does increase in value and if you’re not paying those high-interest rates you can make some very good money. For example, if you’re buying a small house outright, refurbishing it and then renting it out for a few years before selling, you can make a good profit.
You’ll earn money every month and you can wait for the purchase price to increase significantly before selling. The same may apply if you’re buying a rental property with a substantial down payment. You can also make very good money by purchasing vacation properties and taking advantage of the high prices charged to short-term renters.
Art and Collectibles
Collectibles and art are specialized investments known as alternative investments. They require a certain level of knowledge and speculation but like all investments, some options are safer than others.
Collectibles can be a sound investment, especially if you’re investing in something that has tangible value, such as rare gold or silver coins. If these coins lose their non-tangible value, which is the value assigned by market conditions and supply and demand, they will retain their tangible worth, which is locked into the value of gold and silver.
Art, first edition books, comic books, action figures, and stamps are entirely speculative, but if you focus more on the entertainment value and less on the potential investment value, then all inherited worth can be considered an added bonus.
In other words, if you love to read, buy first edition books; if you love art, collect it, frame it, and put it on your walls. In a decade or more, those things should at least retain their value and may increase, at which point you can confidently cash in, knowing that you have had years of use out of owning the item.
How Much Should You Invest Long-Term?
With long-term investments, you generally need to be more cautious than you are with short-term investments. In both cases, you will need to cash those accounts if you leave yourself short, but this is more of a problem with long-term investments as you’ll face stricter penalties and may be asked to jump through more hoops before you can get your money.
If we return to the example of someone earning $3,500 a month, and spending all but $400, a good strategy is to invest $100 in short-term investments and $50 in long-term. Those long-term investments have more time to grow, so you can afford to transfer less money every month.
Summary: Every Little Helps
The idea of investing just $150 a month may not sound like much, but that’s the point. A small investment won’t be missed, it won’t impact your finances, and yet in a few years, it will have grown to a substantial sum.
One of the main reasons to invest is just to give yourself an outlet for money that would have otherwise been wasted on unnecessary expenses. It’s like a piggybank; you add little bits of money every so often and don’t feel like you’re spending anything at all, yet in a few months, you pop the cap and discover you have $30 or $40 in change.
Consumers waste huge amounts of money every month. If it’s there, it will be wasted. By making sure it’s not there, you can reduce your wasteful spending and put the money to good use. Think of it this way: If you had started investing $150 a month 10 years ago and earned an average of 5%, you’d now have a balance of over $23,000 waiting for you.
That’s enough for a down payment, a complete debt payoff, a brand-new car or the vacation of a lifetime—all from a small, token monthly payment! And if that “small” amount is still too much, consider this: Just $50 invested over the same length of time would have created a balance of nearly $7,800.
It’s all relative, it’s all substantial, and it always gets there from the smallest of contributions made with the longest of commitments.