Strategic Timeline For High-Risk Investments: A Guide

High-risk investments are those that carry a large percentage chance of loss of capital or underperformance, or a relatively high chance of a devastating loss. While they can be attractive, offering the potential for high returns, they can also result in significant financial losses. The key to successful long-term investing is understanding the risks and rewards involved and determining an appropriate level of risk for your financial goals. This involves considering factors such as your risk appetite, time horizon, expected returns, and short- and long-term goals.

High-yield savings accounts

Pros of High-Yield Savings Accounts

• Higher interest rates
• Accessibility
• May be linked to checking accounts
• Safer than stocks
• Compound interest

Cons of High-Yield Savings Accounts

• APYs are variable
• Limited withdrawals
• Stricter standards

Who Are High-Yield Savings Accounts Good For?

• Need an emergency fund
• Can't stomach stock-market risk
• Are saving for a short-term goal

There is no definitive answer to how long you should have high-risk investments. It depends on your risk tolerance, investment goals, and time horizon. Generally, high-risk investments are more suitable for experienced investors, while those just beginning their investing journey might prefer to start with low-risk investment alternatives.

It's important to remember that investments promising high rewards usually come with big risks. This means that along with the possibility of making a lot of money, you could just as easily lose it. As such, it's crucial to do your research and understand the risks involved before investing.

Money market funds

However, money market funds have some disadvantages, including low returns, a loss of purchasing power, and a lack of FDIC insurance. The low returns of these funds, typically in low single digits, can result in a loss of purchasing power if the rate of inflation is higher. Additionally, expenses can take a toll on profits, making it difficult for investors to keep up with inflation.

While money market funds are generally considered low-risk, they are not without their risks. Fund managers may take on additional risks to obtain higher yields, such as investing in bonds or commercial paper with higher risks. It is important to note that money market funds are not insured by the FDIC, but they are provided some degree of financial protection by the Securities Investor Protection Corporation (SIPC).

In summary, money market funds offer a stable and secure investment option for individuals looking to invest for the short term. They are typically used for money that will be needed soon or as part of an emergency fund. While they offer low returns and are not FDIC-insured, they provide liquidity, stability, and potential tax efficiency.

Short-term certificates of deposit

CDs generally pay a fixed rate of interest, and the rate is locked in for the duration of the term. Currently, the best CD rates can earn above 4% APY, with the top rate tracked by Bankrate at 4.5% offered by multiple banks on short-term CDs. This is significantly higher than the national average of 1.83% on a one-year CD.

When opening a CD account, individuals can choose from a range of terms, typically ranging from three months to five years. Some banks offer even shorter terms, such as 28 days, while others provide the option to invest for up to 10 years. The longer the term, the higher the returns tend to be. For example, Vio Bank offers highly competitive rates for CDs with terms of three years or less.

It is important to note that funds in CDs are tied up for the specified term, and early withdrawal penalties may apply. However, CDs provide guaranteed growth and security for longer-term savings, making them a worthwhile investment option for those seeking higher returns than traditional savings accounts.

Overall, short-term CDs are an attractive investment option for those seeking higher returns, with the added benefit of a guaranteed rate and the flexibility to choose from a range of term lengths.

Cash management accounts

CMAs feature bank sweeps that move any uninvested cash in the account to program banks, where they earn interest. The partnership that CMAs have with banks allows them to offer competitive interest rates and keep more of your cash federally insured.

When choosing a CMA, it is important to compare the features and benefits of different accounts. While CMAs are typically low-risk, highly liquid, and secure, it is beneficial for the cash in the account to be insured. Only the bank sweep balances are eligible for Federal Deposit Insurance Corporation (FDIC) coverage, but money market funds and any other securities may be eligible for protection by the Securities Investor Protection Corporation (SIPC).

Some additional things to consider are minimum balances required to earn interest, the frequency of compounding interest, and any additional fees or charges associated with the account.

• Wealthfront Cash Account: Requires a $1 minimum balance for APY, offers a 4.00% APY, no fees, and a debit card.
• Betterment Cash Reserve: Requires a $0 minimum balance for APY, offers a promotional rate of 4.50% APY for three months, no fees, and a debit card.
• Empower Personal Cash: Requires a $0 minimum balance for APY, offers a 4.70% APY, no fees, and robust budgeting features.
• Vanguard Cash Plus Account: Requires a $0 minimum balance for APY, offers a high-yield interest rate, no fees with e-statements, and up to $1.25 million in FDIC insurance on individual accounts through partner banks.
• Fidelity Cash Management Account: Requires a $0 minimum balance for APY, offers unlimited ATM fee reimbursement, free check writing, and FDIC insurance of up to $5 million through partner banks.

U.S. Treasury bills, notes and bonds

U.S. Treasury bills, notes, and bonds are among the lowest-risk investments available. They are backed by the full faith and credit of the United States government, which makes the possibility of default extremely low.

Treasury bills are short-term securities with five term options ranging from 4 weeks to 52 weeks. They are sold at face value or at a discount and, when they mature, are paid at face value. Treasury notes are issued with maturities of 2, 3, 5, 7, and 10 years, and they pay interest every six months. Treasury bonds are similar to notes in that they also pay interest every six months, but they are issued for longer terms of 20 or 30 years.

Treasury securities are sold at regularly scheduled auctions, and the schedule of these auctions is released at the Treasury's Quarterly Refunding press conference, which is typically held on the first Wednesday of February, May, August, and November.

While U.S. Treasury securities are considered low-risk investments, it is important to remember that all investments carry some degree of risk. The performance of these securities can be affected by economic issues and market volatility. However, due to the stable nature of the U.S. government, these securities are generally considered a safe investment option.

Frequently asked questions