As inflation rises and markets slip, many investors wonder what lies ahead.
Traditional advice dictates that long-term investors – those who are focused on retirement dates down the road – must continue to move in the markets.
But those with a shorter time horizon of three to five years for a closer goal, such as saving on a down payment to buy a home, need to take a different approach.
“Basic preservation and access when you need it are really the main things you’re looking for for time horizons of up to five years,” said Greg McBride, chief financial analyst at Bankrate.com.
More from Personal Finance: A bear market is emerging. What exactly does this mean? This is a good time for young investors to invest in the market. Better market days are coming. The only question is when
“Don’t be tempted to pursue returns at the expense of basic preservation or easy access when needed,” he said.
As the Federal Reserve is ready to continue raising interest rates, the good news is that savers who have short-term goals in mind are likely to be rewarded with higher interest rates.
At the same time, liquidity must also be a top priority.
Online savings accounts are an “absolute” option that can meet the needs of these savers, McBride said. They offer higher interest rates than ordinary banks. Moreover, these online accounts will probably be among the first to raise interest rates in response to the Fed’s actions.
Certificates of deposit may also be another suitable choice. But it would be wise to choose a six-month CD and then adjust your strategy instead of locking up a multi-year CD at this point, McBride said.
“Once the Fed is nearing the end of its interest rate hike, then may be a good time to lock up a multi-year CD,” McBride said, “unless you expect to need the money before then.”
Similarly, bonds are being advertised as hedging inflation, as they will provide an interest rate of 9.62% over the next six months.
But there are limitations, McBride said. On the one hand, you can’t redeem I bond in the first year. In addition, if you withdraw money before the five-year limit, you will lose quarterly interest. How big the loss of this interest rate will be depends on where the interest rates are in five years.
“I guarantee the bonds that you will keep your purchasing power,” McBride said. “But if you cash in within the first five years, that interest income you lose means that your return will fall just below inflation during that time.
Add Comment