Maybe you're planning to buy a house in the next year or so. Perhaps Junior is in high school and will be heading off to college soon. Or maybe you just have a pile of cash laying around in case of an emergency (good for you!).
Whatever your situation, this might be the question on your mind: What's a safe investment for that money that will give the highest return?
For the answer, ask us in a year and we'll tell you the perfect short-term, high-return place to put your money! Hindsight's like that. Unfortunately, without the power to see into the future, you can't get a high return from a safe investment in a short period of time. The two factors are mutually exclusive.
Sure we've all heard of folks who doubled their money in a year, bought a much bigger house with the proceeds, and lived happily ever after. In hindsight, their investment doesn't seem risky at all. These are the same folks who always find a parking place near the entrance to the mall when it rains.
Even if you aren't expecting to double your money (or get a prime parking space), the principle is the same. The invisible hand of the market adjusts returns so that safe investments pay less than risky ones. A lot less. On average, stocks have returned about 10% per year over the last century, while cash accounts have run around 3%.
While stocks outperform cash accounts and bonds, they only do so over long stretches of time. Any single year can find the average investor mopping up a flood of red ink every time he opens his brokerage account statement. If you really need to spend your saving in a year or two, your best bet is to put that money in a money market account, certificates of deposit (CDs), or bonds.
If you know exactly when you'll need the money (e.g., in 18 months when the first college tuition bill is due) you can invest in CDs or bonds that mature by then. To use those financial products, you have to commit your money to them for a set period of time. If you need your money before the term is up, you may end up paying a penalty or even losing some of your principal balance.
A money market account, on the other hand, doesn't have a set term. You can take your money out whenever you need it. Money markets usually pay a bit less than CDs, but small differences matter only when they compound over many years. So for money that you're not sure when you'll need (e.g., an emergency fund) a money market account might be the best bet.
For tips on choosing the safest, highest-yielding investments for your cash, visit The Motley Fool Savings Center.
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