4 Investments With Less Risk Than the Stock Market
Many new investors fear the market. The thought of their money decreasing in value scares people. In this blog, I will share 4 different types of SHORT TERM investments that carry less risk than investing in the stock market. This information is important to understand because the stock market is not always going to be a buyers market. The two main types of markets there are when looking to buy a stock is a bear market and a bull market.
Bear Market: A market in which prices are falling, which in fact will encourage many investors to sell some of their stocks.
Bull Market: A market in which share prices are rising, many investors feel more comfortable/safe buying stock during a bull market.
With credit card, and student debt sitting at an all-time high, many people are looking for ways to minimize risk and these low-risk options may be what you are looking for.
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Best Short-Term Investments: High Yield Saving Account
A high yield saving account is an investment that provides essentially no risk, while also receiving a return on your investment. Since the level of risk for this investment is relatively low, you are not going to make a ton of money in return but you can receive up to 1.90% APY (Annual Percentage Yield) with an online bank. An online bank can provide such a high APY due to their expenses being lower than traditional banks with physical locations. As an example, if you set aside $10,000 in a high yield savings account and let it sit for the whole year, your money will make $190 on its own. This is a super safe investment and your money will be working for you instead of letting it sit in a traditional savings account making 0.01% per year.
Some solid options that pay higher annual percentage yields are Synchrony Financial, American Express, and Goldman Sachs. The accounts listed above and some other institutions are fully FDIC certified meaning you have protection up to $250,000 per person. These accounts also don’t have time limits. You can keep your money in this account forever if you wanted.
Some of the cons of having this type of account are that you may need an account minimum in order to open up this type of savings account. After opening the high yielding account, you will not be able to swipe your card as a debit card. Most people receive an ATM card they can only take cash out of an ATM and others don’t even get an ATM card at all to refrain from spending the money in that account.
Best Short-Term Investments: Certificate of Deposit (CD)
A CD, or certificate of deposit, is a savings account that has a fixed interest rate and fixed date of withdrawal, known as the maturity date. CDs also typically don’t have monthly fees. This is another investment that essentially has no risk unless you deposit your money before the maturity date. There could be a penalty and your money may not mature completely.
If you are willing to lock in your money for a fixed period of time this could be a great short-term, low-risk investment. Some of the highest Annual Percentage Yields on a CD can be up to 3.10%. These are accounts you can start with a bank, online bank, and credit unions. CD’s usually start at a minimum of letting your money sit and mature for 3 months but they also have them up to 10 years. Your average CD would be anywhere between 6 months – 3 years. Usually, the longer you let your money sit in a CD the higher the APY is.
The con of a CD is that some banks would like you to have an account minimum. Some have no minimums so don’t let that discourage you.
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Best Short-Term Investments: Pay Off Debt
In times where the stock market may not be doing well or you are just intimidated to invest in the market, paying off debt is always a great option. If you are sitting on a lot of cash or you sold your stocks due to the market crash, this is a great opportunity to pay down debt.
Debt usually comes with an Annual Percentage Rate (APR) or an interest rate and that is what destroys people. Credit card debt and student loan debt is at an all-time high. If you have high-interest credit card debt, it may be smarter to pay that off before investing. The reason is that, if your credit card has a 20% APR and you invest in the market and only make 10% return on investment, you are not even offsetting one another. Your 20% APR is something that you are guaranteed to pay each month while investing in the stock market is not guaranteed. You can have a great year where your money grows 15% or you can have a bad year where your money decreases 1%.
For more tips, tricks, and ideas on whether you should invest or pay off debt, read more at Should You Pay Off Debt Or Invest- Which One Is Best For You?
Best Short-Term Investments: Peer-To-Peer Lending
Peer-to-peer (P2P) lending is a method of debt financing that enables individuals to borrow and lend money without the use of an official financial institution as an intermediary. Peer-to-peer lending removes the middleman from the process, but it also involves more time, effort and risk than the general brick-and-mortar lending scenarios.
You can participate in P2P on websites such as Lending Club and Prosper. These are websites that allow you to lend money to someone and they will get charged a certain interest rate for borrowing money from you. You are paid interest, and the principle on a monthly basis and the interest rate can be more than 5%.
I would not recommend investing all of your money in peer-to-peer lending due to its risky nature. I would only put a small percentage of money in this type of investment if I wanted to stay out of the stock market. It is a good way to diversify your investments while also making 3% or more return on your investment. This is the riskiest option throughout all of the topics discussed today but it could be a great way to invest a small percentage of your money.
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