Short-Term Investments Can Increase Reward and Decrease Risk

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Concerns about rising inflation, interest rates and global geopolitical uncertainty might have you feeling uneasy about your money. Are your retirement savings protected in the event of a stock market crash or prolonged economic downturn? Believe it or not, there are some lesser-known short-term investments that can increase reward and decrease risk to safely grow your money during turbulent times, while also providing you the opportunity to reinvest when the economic landscape stabilizes.

5 Ways to Fight Inflation’s Impact on Your Retirement Plan

Investing Is a Double-Edged Sword

High inflation and market volatility make having a diversified investment strategy vital to long-term financial success. By investing both in the stock market and in other alternatives, you get the diversification you need to weather a market downturn. Every investment type is a double-edged sword. If you pull out of the market and retreat strictly to cash, inflation will suck the life out of your money. And if you invest everything you own into a down market, you may compound your losses.

Don’t Sit on the Sidelines Out of Fear

Investors with a lot of cash are sitting on the sidelines. This is something we haven’t seen since the Great Recession. People are nervous. In a low inflationary environment, sitting on the sidelines in all cash may work, but with inflation rates around 8%, people need to find alternative means to grow their wealth. Sitting in cash guarantees your dollars are losing value according to whatever the inflationary rate is. There are places to “park” your money, obtain guaranteed yield and help fight inflation. One key to retirement planning is making sure your dollar is appreciating.

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Here Are Some Short-Term Investment Options

Series I savings bonds are low-risk savings products purchased directly from the government, backed by the U.S. Treasury Department and designed to protect against inflation. The yield is determined by a fixed rate, which remains the same for the life of the bond, and an inflation rate, which is based on the consumer price index (CPI). Twice a year, the Treasury sets a new inflation rate for the next six months. Series I bonds were designed to be a long-term investment, but because of record-high inflation, they could be used effectively in the short term.

Be aware, because rates do change, it’s important to understand how long you plan to be invested in the Series I bond in order to make it an effective short-term investment. You can cash out I bonds after one year, but there will be a penalty equal to your last three months of interest if you cash out in the first five years.

I bond interest is free of state and local income tax, and you can defer federal tax until you file a tax return for the year you cash in the bond. Working with an experienced professional can help you understand what your effective yield will be if you plan to withdraw your funds within a couple of years.

Treasury bills (T-bills) are a short-term government-backed investment 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 face value. You are paid the bill’s face value when it matures.

Interest paid is simple interest, meaning you make money only on the principal, and you do not receive that interest until maturity. You can either hold a bill until it matures, or you can sell it before it matures. While there is no penalty to sell a T-bill early, you may not get back all the money you invested. If you sell when rates increase, you will have losses, because new T-bills can be bought at a better rate than yours.

I-Bond Rate Is 6.89% for Next Six Months

You can also sell for a profit if T-bills fall after your purchase. Usually, when you buy a treasury or bond, you get a better yield the longer the maturity. But because of the inverted yield curve, long-term rates like the five-year treasury currently pay less than a short-term treasury, like the one-year and three-year. Currently, T-bills are paying well above historical averages.

Fixed annuities are like a CD, a short-term guaranteed investment designed to park money until the maturity date. A fixed annuity offers a guaranteed rate for one to 10 years, no fees, compounding interest and ability to sweep out the gains each year or let them compound. Currently, the three-year and five-year fixed annuities are paying above historical averages and make the most sense from a time value of money standpoint.

You can also look at short-term fixed-index annuities (five years) that allow you exposure to equities with index funds like the S&P 500. The beauty is you can invest in the index with only upside earnings ability with principal protection. Pay attention to the participation rates that dictate how much of the gains you get to keep.

Fixed-index annuities also have guaranteed fixed accounts with many paying higher yields than T-bills with the ability to shift from fixed account to index funds each year. So, you could outearn a T-bill in the fixed account during times of volatility and reinvest in the market with the index funds provided to maximize yield potential.

You can also mix and match by having some money in the fixed account and some in the index account. If you are looking for higher yield potential than a T-bill or fixed annuity, a short-term fixed-index annuity could be a great solution away from market volatility.

Diversification is the key to any successful financial plan, whether you are investing for the short or long term. Series I savings bonds, Treasury bills and fixed annuities are currently paying well above historical averages.

3 Ways to Get Future Lifetime Income with Annuities

Each investment has its own unique benefits, but now is the time to sit down with an experienced financial adviser, revisit your investment strategy and find out what combination works best for you to turn a down market during high inflation in your favor.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Bradley Rosen is the owner and president of Longevity Financial, an independent financial professional with over 24 years of financial planning experience. Bradley provides each client with a customized Design for Life By Longevity FinancialⓇ plan that encompasses each part of their financial picture, including investments, insurance, taxes and legacy planning. He is passionate about creating longevity with one’s finances and prioritizing holistic health, both physically and financially. His unique approach to retirement planning is the result of watching both his grandmothers outlive their retirement income. For his dedication to educating and empowering women, he was awarded the Thelma Gibson Award in 2015. He has been featured in Forbes and on the local CBS, NBC and FOX TV news affiliates in his new hometown of Atlanta.