Investing When Your Time Horizon Is Short

Money market fund yields now average more than 4 percent, for large funds sampled by Peter G. Crane, the president of Crane Data in Westborough, Mass. Major companies like Vanguard, Fidelity, Schwab and T. Rowe Price offer such funds. Their yields have rapidly soared from near zero over the last year, following the lead of the Federal Reserve, and they are highly likely to rise closer to 5 percent if the Fed continues to raise interest rates, as it has indicated it intends to do.

Some high-yield savings accounts — which carry government guarantees, unlike the higher-yielding money market funds — are now offering interest rates above 3 percent, according to Bankrate.com. Bank C.D.s of a duration of one year or more are beginning to provide yields above 4 percent. Treasury notes with a maturity of two years are offering yields over 4 percent, and Treasury inflation, or I bonds, are paying 6.89 percent.

In short, at the beginning of 2022, short-term holdings offered almost nothing appealing. Now, there is a broad range of options with relatively handsome yields, though none look particularly good when inflation is still running at a 6.5 percent annual rate, as the latest numbers show.

When you can afford to invest for decades to come, the arguments for both stocks and bonds are compelling.

For the 25 years through December, the S&P 500 returned 7.64 percent annualized, including dividends, according to data compiled by Howard Silverblatt, senior index analyst for S&P Dow Jones Indices. That means that in six or seven years, your investment would have doubled, over and over again, outstripping the rate of inflation in most years.

Bonds haven’t produced returns of that caliber over the long haul, but they have been quite good, nonetheless — with returns of more than 6 percent annualized for diversified bond portfolios, based on Vanguard data.

But these gaudy long-term returns contain within them some horrible years, and 2022 was one of them. If you needed to convert stocks and bonds to cash, you probably incurred big losses.

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