Concerns about rising inflation, interest rates and global geopolitical uncertainty can make you feel 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 giving you the opportunity to reinvest when the economic landscape stabilizes.
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 in both the stock market and other alternatives, you get the diversification you need to weather a market downturn. Every type of investment is a double-edged sword. If you exit the market and retreat strictly to cash, inflation will suck the life out of your money. And if you invest everything you own in a bear market, you can increase your losses.
Don’t sit on the sidelines out of fear
Big money investors are sitting on the sidelines. This is something we haven’t seen since the Great Recession. People are nervous. In a low-inflation environment, sitting on the sidelines with all the money can work, but with inflation rates around 8%, people need to find alternative means of growing their wealth. Sitting on cash ensures that your dollars are losing value based on what the inflation rate is. There are places to “park” your money, get guaranteed returns and help fight inflation. One of the keys to retirement planning is making sure your dollar appreciates.
Here are some short-term investment options
Series I savings bonds (opens in a new tab) they are low-risk savings products purchased directly from the government, backed by the US 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 due to record inflation, they could be used effectively in the short term.
Note that because rates change, it’s important to understand how long you plan to invest in the Series I bond to make it an effective short-term investment. You can withdraw 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.
Bond interest is free of state and local income taxes, and you can defer federal tax until you file a tax return for the year you cash the bond. Working with an experienced professional can help you understand what your effective return will be if you plan to withdraw your funds in a couple of years.
Treasury Bills (Treasury Bills) (opens in a new tab) they are a short-term government-backed investment with maturities ranging from four weeks to 52 weeks. They are considered one of the safest investments in the world. Treasury notes are sold at a discount or at face value. You are paid the face value of the bill when it comes due.
Interest paid is simple interest, meaning you earn money only on the principal and don’t receive that interest until maturity. You can hold a bill until it matures or you can sell it before it matures. Although there is no penalty for selling a Treasury bond early, you may not get back all the money you invested. If you sell when rates rise, you’ll be at a loss, because new Treasuries can be bought at a better price than yours.
You can also sell for profit if the Shamrock letters fall after your purchase. Typically, when you buy a bond or bond, you get a better return the longer the maturity. But because of the inverted yield curve, longer-term rates like the five-year Treasury currently pay less than shorter-term rates like the one-year and three-year. Currently, Treasuries are paying well above historical averages.
Fixed annuities are like a CD, a guaranteed short-term investment designed to park money until the maturity date. A fixed annuity offers a guaranteed rate for 1 to 10 years, with no fees, compound interest, and the ability to sweep earnings each year or let them compound. Currently, three- and five-year fixed annuities are paying above historical averages and make more sense from a time value of money standpoint.
You can also look at short-term (five-year) fixed index annuities that give you exposure to stocks with index funds like the S&P 500. The beauty is that you can invest in the index only with upside earning potential with principal protection. Pay attention to the participation rates that dictate how much winnings you can keep.
Fixed index annuities also have guaranteed fixed accounts with many paying higher yields than Treasuries with the ability to switch from fixed accounts to index funds each year. So you can earn a Treasury bill in the fixed account during times of volatility and reinvest in the market with the index funds provided to maximize return potential.
You can also mix and match by having some money in the fixed account and some in the index account. If you’re looking for higher return potential than a Treasury bill or fixed annuity, a short-term fixed index annuity can be an excellent 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.
Each investment has its own unique benefits, but now is the time to sit down with an experienced financial advisor, review your investment strategy, and figure out what combination works best for you to turn down a bear market during high inflation in your favor. .
This article was written by and represents the views of our contributing advisor, not the Kiplinger editorial team. You can check the advisers’ records with the SEC (opens in a new tab) or with FINRA (opens in a new tab).