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Short term investment strategies differ from long term investment strategies because the goals are different and the investment types are different.
When investing for the short term, investors tend to have a timeline of a few months to a year or two.
Short term investing implies that the investor either needs access to his funds in the short term, because of a specific deal, or he would like to invest in the short term them while looking for potential long term deals.
Each short term investment has its own risk profile. For example, insured savings accounts are less risky than short term p2p investments. Government bonds are less risky than Municipal bonds. However, the higher the risk of loss of capital the higher the return.
The first rule of investing is not to lose your capital. The higher the risk of your investment the more financially savvy you need to be to understand the risks.
Not keeping up with inflation is a form of loss, short term investing might be able to counter that. Inflation is a hard thing to pin down, to make it more confusing there are conflicting reports on inflation.
Pros of short term investments:
- Opportunity to make passive income in the short term.
- Able to make money while waiting for new opportunities or while waiting for the financing of a deal.
- Diversification of asset holdings
Cons of short term investments:
- Exposing your capital to risk
- Some short term investments have a lock-in time period.
- Many short term investments are not FDIC insured and risky
- The returns do not keep up with inflation.
- Short term investment opportunities index.
Short term investing index
- Pay Off High-Interest Debt
- Pay off non-productive debt
- Cash Back Rewards Offers
- Savings Accounts
- Checking Accounts
- Certificate of Deposits (CD)
- Short term government bonds
- Corporate Bonds
- Muni Bonds
- Non Convertible Debentures
- P2p lending
- Invoice factoring
- Short term Stock investing
- Roth IRA
- Calls and Puts
- Crypto Day Trading
- Crypto staking
- Crypto lending
- House Flipping
- Car Flipping
- Website FLipping
- Event pop up store
- Online-Offline product arbitrage
- Paid Event
- Extreme market events
Pay Off High-Interest Debt
The easiest way to make a guaranteed profit in the short term is to pay back any high-interest debt you have. Especially the non-productive kind of debt.
This is a no brainer and is essentially risk-free, the profit is guaranteed.
The disadvantage is that you will lose access to the capital you pay back, on the other hand, you will have access to more cash flow because you will not have to pay your monthly instalments.
Pay off non-productive debt
Car, TV loans with lower interest rates can be paid off to increase future cash flow, but the capital will not be available.
The decision on paying off debt depends on the opportunities you have and their risk profile.
Paying off debt is a risk-free “investment”, investing comes always with some kind of risk. Losing access to your capital though, has an opportunity cost because you will close the doors to several business opportunities you might have on the horizon.
Companies and credit card companies do cashback offers in order to entice customers to prefer them over their competitors. The system is simple, buy a product or use a credit card to buy a product and we will give you send cash to your account.
In accounting terms, this is the same as a discount but psychologically receiving something is more powerful than having to pay less for something.
Frugal means being very conscious in how you spend your money. Getting the highest bang for your buck. This investment gives 100% return on your investment. Anything you do not spend on today is money saved. Learn more with our detailed Frugal living Tips
Checking account / Current Account
A checking account is linked to your cheque book. A current account is a highly liquid banking account. They are very similar in terms of short term investing.
Most checking and current accounts have very low-interest rates, however, there is little difference between the interest rates of current accounts and Checking accounts. Like a savings account, a current account is FDIC insured.
A savings account pays more interest than a current account, like current accounts savings accounts are government-insured up to 100k in the EU and 250k in the US.
Large deposit holders are not safe when the next crisis will hit.
There are banks which offer high yield savings accounts, these tend to be online banks. Savings accounts tend to have no limitations in terms of withdrawing your funds, there might be fees when doing more than a number of transactions in a certain period of time.
A Certificate of Deposit or a Term deposit account
A Term deposit account is a bank account which is locked for a specific amount of time. The maturity of term deposit accounts is agreed by the bank and short term investor. This can vary from a few months to a few years and typically the longer the term the higher the interest rate. Some banks interest payments are done at the end of the period others throughout the period.
In principle, the funds in a certificate of deposit or a term deposit can only be withdrawn after the maturity date. In order to access your deposit early, there are penalties, check these before you sign off on the CD. See Also: Euro short term CD
Money market accounts
There are many different types of Money market accounts, some are FDIC or government-insured while others are not.
Their interest rate is based on the amount in deposit rather than the length the deposit is blocked. Money market tend to have all the facilities of a checking account with ATM and cheque withdrawal, some have a limit on the amount and number of withdrawals that can be done in any month.
When a money market account “breaks the buck” it means that the capital invested cannot be returned in full. When one buck is invested (i.e. $1) but 99c returned, the buck is broken.
Savings / Current Account in a foreign currency
Not all currencies have the same interest rates, moving from one currency to another in order to take advantage of higher interest rates could be profitable. Learn more: Worldwide interest rates.
There will be exchange rate fees and the potential loss of capital through the devaluation of that currency.
In Turkey, at the moment the interest rate is 24% yearly but the inflation rate is about 15% monthly!
Liquid mutual funds invest in short term debt, typically less than 100 days. Each country has some version of this type of investment vehicle.
Investing very small amounts in these funds might result losses because the fees incurred in investing and divesting would be higher than any profits. Do calculate the transaction costs in addition to the potential profit before you invest.
It is important to check the liquidity of a bond or fund if you are planning to invest only in the short term.
Bond ETFs (electronically traded funds) buy a number of short term bonds and manage them under one umbrella. An ETF Bond will have a mandate to focus on specific or a mix of bonds. The diversification in many bonds is a plus, it minimizes the potential losses in case any one bond defaults.
In addition the underlying value of the bond can decrease (or increase) according to the market. What this means is that a bond purchased at 100 could be redeemed at 95, if sold before maturity, a 5% capital loss. This is valid for any bond which is traded on the markets
Short term mutual bond funds and ETFs (Electronic traded funds) group several short term bonds under one umbrella. Because they invest in only short term bonds, they are highly liquid.
Visible and invisible fees have a high impact on all invested funds. There could be entry, exit, maintenance, administrative and many other fees. Read the small print. These fees might make owning and selling the fund too costly, especially if the amounts invested are small.
ETFs offer several tax advantages (make sure these also apply to your tax situation) since they reinvest the capital. In some jurisdiction, each interest payment will be taxable if these happen within a fund they might not be, check all the info in this document with a tax professional.
There are three types of short term bonds
- Government Bonds
- Corporate Bonds
- Muni Bonds
Government bonds can be bought directly from TreasuryDirect.gov and indirectly through ETFs or mutual funds.
Bonds are not government-insured. Their liquidity varies, which is crucial for you as a short term investor. Bonds maturity varies from anything between a few months, few years to a few decades.
Bond funds buy short term bonds, some of them specifically by Government bonds including treasury notes, bonds and bills and securities which are government-backed.
The risk of investment in these bonds is tied with the risk that the government doesn’t pay back these bonds.
Countries like Venezuela and Zimbabwe have a hard time convincing investors they will pay back because they have defaulted on their bonds in the past, other countries who have defaulted only a few times. Government bonds for developed countries tend to be very liquid which makes them interesting to the short term investor can have access to his funds
Government bond examples:
- There are several short term and long term investments available directly from the US government
- TIPS (Treasury Inflation-Protected Securities) government bonds whose value is indexed to inflation, this is more of a longer-term. Meaning if inflation goes up then the value of the bond goes up. The interest of this type of bond is lower but the underlying capital has less risk. TIPS interest is taxable once paid, on the other hand, a TIPS ETF allow for the interest to be repaid and reinvested. TIPs are more interesting over a longer time horizon because inflation tends to have a smaller effect in shorter time horizons.
- Vanguard Ext Duration Treasury ETF. This fund invests in long term debt, but since at this time it has high liquidity it can serve the interests of the short term investor.
- A full list of Government Bond vehicles
Bonus Government debt Tips:
- Some government bonds, have negative interest rates which means you will surely get less capital than you invest.
- Government debt has different names in different countries, for example, in the USA they are referred to as treasuries in the UK as Gilts.
- Learn more about the hidden perils of Government debt
Short term Corporate debt: Corporate Mutual Funds and ETFs
Corporations need capital to invest, they acquire capital by borrowing, this debt is called a bond. Some corporate bonds are short term and others long term. Some bonds pay regularly others pay at the end of the term (bullet).
Corporate bonds have a higher risk of defaulting than certain government bonds. Governments can tax their citizens for income, corporations need to make a profit. If corporations fail to pay the interest or capital on their debt they default.
Examples of Corporate debt ETFs
- Vanguard Short-Term Investment-Grade Fund (VFSTX)
- Fidelity Short-Term Bond Fund (FSHBX) Mix of Government and corporate debt
- DFA Short-Term Extended Quality Portfolio (DFEQX)
- Schwab Short-Term Bond Index Fund (SWSBX)
- Learn more: Corporate debt bubble
Municipal bonds are debt issued by municipalities, there returns depends on the risk of default. Each country has their flavour of muni-bonds, and each of those come with a different set of pros and cons.
In the USA Muni bonds can be either be backed by revenue-generating assets such as toll bridges or they come unbacked usually referred to as general obligation.
Muni bond interest is generally not taxed only at a federal level.
Example of a Muni Bond: Nuveen short term municipal bond fund
Research: US Municipal Bond Defaults and Recoveries, 1970-2016
Non Convertible Debentures
Companies need working capital for their operations, NCDs provide a simple way for companies to borrow money. Some NCDs are secured with collateral such as stock, invoices and other receivables while others aren’t. NCDs can have interest rates higher than 6%. NCDs can vary in maturity between 1 and 5 years. Learn more about: Debentures
Peer to peer lending.
P2p lending platforms allow investors access to debt deals. These debt deals can range from 30 days to a few years, and these loans might not be paid at the end of the term. Some platforms have some kind of insurance or buyback guarantee on any unpaid debt. Most of these debt insurance schemes depend on the liquidity of the company insuring them. I am not aware of any regulations that regulate the amount of funds need to be held back to back these buy-back schemes.
Peer to peer lending is risky. Lendy a UK based peer to peer lender recently failed.
The Lendy investors do not know what percentage will receive on their invested money. On the other hand, there are many platforms out there who might be a good match with the investor.
- Mintos is based in the E.U. it is a platform on which various p2p loan originators lenders can list their loans. These loan originators compete with for the best rates.
- EstateGuru: Is a p2p based lender mostly servicing bridging loans.
- Prosper: based in the USA, has various debt offers at different interest rates.
- Lending Club: is also based in the USALending club’s market as qualified investors. Interest is paid monthly, Unlike prosper Lending club sets the interest rates and have a very strong vetting process for borrowers.
P2p platforms tend to issue bonds and then buy back the best debt from time to time putting investors in a precarious situation by destabilizing their portfolios. Watch out.
The life of a business is cash flow. That is the flow between outcome or expenses and income or revenue. A lot of business income is tied up in unpaid invoices.
Invoice factoring allows businesses to sell their invoices at a discount. This is managed through a third party which allows multiple companies to offer their invoices for sale, the invoices are then paid directly to the third party.
Invoice factoring firms will have more expertise in debt collection and will be less flexible in terms of collecting their invoices. So the invoiced companies might frown over this practice.
Private investors can now participate in invoice factoring through companies like
Invoice Factoring platforms:
A short term trade in Gold could make sense in several cases, one of them is when the base currency is inflating rapidly or depreciating. Gold tends to keep its purchasing power and is considered to be a safe haven. So moving your capital to Gold could protect its purchased purchasing power.
When investing in gold there are still risks of price fluctuations, transaction costs, storage costs and possible new regulations and limits on the importation and exchange of gold.
Gold is especially interesting for someone who is living in high inflation countries such as Venezuela or Zimbabwe, who have a history of financial instability. Today there are services that offer seamless gold storage and exchange like uphold.com and bullionstar.com
Silver is both a precious metal and an industrial metal. It has higher storage costs because it is bulkier than gold. It has a higher holding cost because it’s bulky thus having higher storage costs. Gold is the go-to metal when considering a safe haven.
In the very long term though, silver is being used up more than gold and the actual above-ground reserves are decreasing unlike those of gold, but this will only apply to the very long term investor.
See Also: Hold Gold, Silver, Platinum and Palladium from anywhere in the world: Bullion in Singapore.
Stock Day Trading
The number of day traders who are successful in trading the daily volatility of the stock market is very few. At some point either leverage, the market, emotions or burnout gets to day traders.
A minority of traders manage to make a living out of this activity by risking their capital for short term profits. Today it is even harder because of algorithms and asymmetry in analysis exists between retail traders and large investment banks. Large trading firms are monitoring things such as private jet movements and satellite data to have an edge in their trading.
Day Trading focuses on technical analysis (TA), which means chart analysis and number crunching of the stock movements. Some believe that this prediction system is more of an art than a science, others think TA is a waste of time.
You will find many courses on technical analysis out there, one question that keeps coming to my mind on any trading system is: “If someone has found such an incredible trading system, why would they ever share it with others?”
Short term trading feels more like betting than investing. The fundamentals have very little impact on the day to day movement of the price. Day trading is riding the ripples of volatility. Trying to bet where the next pebble will hit the pond today.
Short term investment in stocks
Investing in stocks for the short term 3 months to 1 year might be profitable for traders who can merge, company analysis, macro analysis and industry analysis. To do so one needs to understand an industry inside and out including; the regulation landscape, the competing forces within the industry, the macro environment and the political forces that shape this industry.
Such knowledge is acquired over many years of reading, learning and experiencing a particular niche. Trying to do this without such knowledge increases your risk of losing your capital..
Short term stock market investing is a “bet” on some companies outperforming others, in the eyes of the market.
First, identify a few companies within a specific sector, you need to deep dive into their accounts, key rations, past and future; announcements, financial news coverage, M&A targets, company reports, sec filings, analyst recommendations and director and manager bios. Other traders will know all this info at the tips of their fingers, not playing on the same level field gives you a disadvantage.
Once you know the industry and your key targets well, you need to organise this information in potential outcomes. For example which company is most likely to have fluctuations in their share price in the next 6 months? Diversifying risks in multiple stocks will reduce the risks of your trading strategy.
Clear profit and stop-loss targets are a must to avoid emotional investing and against strong market movements.
Roth IRA is a tax-advantaged, US-based investment account which allows you to invest capital and then withdraw returns in a tax advantageous way. For some particular short term investing strategies, this might be an interesting vehicle. However, there are restrictions on when you can withdraw your initial capital investment.
There are short term investment opportunities in the cryptoverse. These markets are highly volatile and can offer buy-low then sell-high opportunities, it is not unheard of that a cryptocurrency or token goes up or down 10% or more in a day! Cryptocurrencies do not have full regulatory coverage, what this means is that this pace can have new regulations imposed on it which might flip upside down the whole value proposition of this space. There are no guarantees, governmental or otherwise in any of these short term crypto investments.
Crypto trading is like stock day trading on steroids. The crypto market is unregulated, this makes it a fertile ground for manipulation. Day trading cryptos is riskier than day trading stocks.
Pump and dump groups https://bitfalls.com/2018/01/12/anatomy-pump-dump-group/ are organized groups that manipulate both the markets and the participants within these groups!
Instead of day trading yourself, you can use a crypto fund does day trading professionally
Crypto staking is kind of similar to a term deposit account, the investor locks in a certain number of tokens and the system rewards him with more tokens. Learn more: What is Crypto Staking? LINK. There are a number of currencies which offer staking such as Cosmos, EOS (through EOS Rex) and Pivx. In staking you have the opportunity to make short term gains from staking. It is very easy to make a loss as the token price in USD is highly volatile.
Some cryptocurrencies can cold sake, meaning, your computer does need to be online and others can only hot stake, your computer needs to be online.
LINK to staking articles
Masternodes LINK, are like cryptocurrency servers. These servers require an amount on account to be activated. This is similar to a term deposit account or staking, however, the difference is that the amount is fixed, while in staking there generally is no minimum.
Since the capital required to generate passive income is higher, the risk is also higher.
Flipping is an investment focused on buying low and selling high. Hereunder I list some pointers on homes, cars and websites. There are more items with this potential though, such as boats and even planes.
Flipping Homes is potentially a great short term investment. The stakes are high due to the high prices of property, a mistake can cost thousands!
Essentially there are two ways to flip a house. The first is to buy a house, then fix it up and then resell it. The second is to buy a house in a rising market wait for the market to heat up further and then sell at the top.
Mistakes such as not consulting a good real estate agent or not getting a professional inspector to find go through the knocks and crannies could be the nail in the coffin of your house flipping dreams.
Financing a house flip is a challenge for most, and it is tempting to attempt this investment with a mortgage or short term loan. Some seasoned real estate flippers manage to do this, however, loans have an interest and this eats up from the potential end profit. Cash is a method to finance house flipping.
For a flip to have potential, in general, you need to buy a house 20% below the market price and plan to sell it at the lower end of the market range in a neighbourhood.
Car flipping is another potential short term investment, Since cars are less costly than homes, there is less capital at risk. If you have a good understanding of cars and are willing to take a calculated risk, then this might be the thing for you.
The basic idea of car flipping is to buy low, add value to the car and then sell it a higher price.
Buying a car at a low price means, finding the right deal. The first thing is to source the car from the right place. Craiglsit, people’s drive-ins or online classified ads have potential, but car dealers less so.
The first challenge with this investment is the capital, ideally, it is best done with your own funds rather than through a loan. This is because you will end up losing more money if you take a loan and the flip does not work out.
Your car flip should be sold quickly. Match your purchase to the season and area. In snowy winter a 4×4 might be sold more easily than a motorcycle. Focusing on the lower end price range will make it easier to diversify with several car deals. In addition, buyers will overlook any defects in cheap cars. A luxurious car might have a higher profit margin but are a higher risk for the beginner car flipper.
Use KBB to evaluate the value of a car like a pro. LINK
When selling your car be genuine, post real pictures and do not oversell your car. The happier customers you have the more likely they will recommend you to their friends.
There are webmasters who buy sites, upgrade them and then resell them. They do all this in a matter of months and earn a hefty profit in each flip. This short term operation requires a specific set of skills, business acumen and negotiation, but it definitely can be done. For every successful website flip, there are several who make a loss.
The process is simple, find a website for sale which has potential, understand where and how it can be easily upgraded, then buy it and sell it.
There are many sites for sale and most of them are not good deals, but some of them are being sold by tired webmasters or due to personal emergencies. It is these deals that have the potential to be flipped quickly and for a profit.
There are risks to website flipping because value primarily depends on incoming traffic, and this traffic is very volatile. Google can change it’s ranking in a day. The value of a site can plummet and your investments could be worth nothing.
Learn more: Buying Websites for passive income
Event pop up store
A high-risk short term investment could be an event pop up store. For example during a national election selling T-shirts for one party, or selling night glow bands during a rave party. These are a very short timed investment that could turn out a hefty profit in a very short period of time.
Online-Offline product arbitrage / Retail arbitrage
Buying product during sales from brick and mortar shops to resell them online. Megastores have a need to change stock and they sell their old stock during sales, getting in early and buying the best pieces, then selling them on eBay might either make you money or leave you with a well-equipped wardrobe. If you puy clothes you like and your size, this investment might not be a complete throwaway if it fails.
Organising Paid Events
Organise a paid-for event, this could be a rave, the 80s themed disco party or a new years eve party. If these events are on a larger scale they might take one full year to organise. The risks are high because you can either win all or lose all in most of these cases. The power of word of mouth, your promotion and marketing would be the crux of such an operation.
Extreme market events
If you have time-sensitive information for example that some product or service will be in high demand in a few days, then you can get organised to source this product and have it ready for sale when the demand spikes. Fires, Earthquakes, Droughts, Electricity cuts and Hurricanes all-cause market swings. There is a fine line between short term investing, profiteering and offering value, the reader must make his own judgment call on this one. Example: Wood and Hurricanes
There are many short term investments, some are structured and require little or no effort others are more of a short term business, which requires time and effort. Each person needs to adapt his investment according to his risks and resources.
Short term investments require more management as there is work for the investor each time and investments starts and ends. So short term investments tend not to be good for passive income because they require a lot of maintenance and are more difficult to automate.
Learn more about investing and passive income: