As inflation soars and markets slide, many investors are wondering what’s coming next.
Traditional advice dictates that long-term investors — those who are focused on retirement dates further down the road — should stay the course in the markets.
But those with shorter time horizons of three- to five-years for a closer goal, like saving for a down payment to buy a home, should take a different approach.
“Principal preservation and access when you need it are really the main things you’re after for time horizons of up to five years,” said Greg McBride, chief financial analyst at Bankrate.com.
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“Don’t be tempted to chase returns at the expense of principal preservation or easy access when needed,” he said.
With the Federal Reserve poised to continue to raise interest rates, the good news is savers with near-term goals in mind will likely be rewarded with higher interest rates.
At the same time, liquidity should also be a top priority.
Online savings accounts are “absolutely” an option that may fill these savers’ needs, McBride said. They offer higher interest rates than brick-and-mortar banks. What’s more, these online accounts will likely be among the first to raise their 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, rather than locking in a multi-year CD at this time, McBride said.
Once the Fed gets closer to wrapping up its rate hikes, it then might be a good time to lock in a multi-year CD, McBride said, so long as you do not anticipate needing the cash before then.
Similarly, I bonds have been touted as an inflation hedge, as they will provide a 9.62% interest rate in the next six months.
But there are limitations, McBride said. For one, you cannot cash an I bond in the first year. Moreover, if you cash out before the five-year mark, you will forfeit three months’ interest. How big a deal losing out on that interest will be depends on where interest rates are five years from now.
“I bonds guarantee that you will preserve your buying power,” McBride said. “But if you cash within the first five years, that interest earnings you forfeit means your return is going to fall just short of inflation over that period of time.”
