Time plays a vital part when it comes to investment strategy. With that, there are a variety of different types of investments that investors usually fall into and these are short-term and long-term investments.
What defines long-term and short-term investments? Long-term investments are those vehicles that you intend to hold for more than one year — in fact, you generally intend to hold them for several years. On the other hand, you usually hold short-term investments for one year or less. Obviously, both have benefits and drawbacks and the strategies involved in the two could lead to different results.
So what is the difference between short term and long term investments? Specifically, it’s important to keep in mind the difference between the two.
They carry different risks
All investments carry some type of risk. One of the biggest risks associated with long-term investments is volatility, the fluctuations in the financial markets that can cause investments to lose value. On the other hand, short-term investment vehicles may be subject to purchasing power risk, the risk that your investment’s return will not keep up with inflation.
As an investor, you’ll probably need a mix of long-term and short-term vehicles. By knowing the differences between these two categories, you should have a good idea of what to expect from your investments — and this knowledge can help you make those choices that are best for you.
They can satisfy different goals
If you purchase investments that you intend to hold for the long term, you probably have a long-term goal in mind such as building resources to help pay for a comfortable retirement or leaving a legacy. On the other hand, a short-term investment would be more appropriate if you know that you will need a certain amount of money at a certain time perhaps to purchase a car or to fund a vacation.
Investing in stocks and bonds is a good example of a short-term investment. Precise timing of purchasing and sale of stocks could make you a millionaire in just one night. However, you might end up losing every last penny making a bad bet on an investment.
Meanwhile, long-term investments are usually picked as an investment option where there is a lot of time on hand, as is the case with say, a retirement fund, which keeps growing over the years, maturing just as you need them.
They carry different expectations
When you purchase an investment that you wish to keep for many years, you may be expecting the investment to increase in value so that you can eventually sell it for a profit.
Moreover, you may be looking for the investment to provide income. When you purchase a short-term vehicle, you are generally not expecting much in the way of a return or an increase in value. Typically, you purchase short-term investments for the relatively greater degree of principal protection they are designed to provide.
They meet different needs at different times of life
You will have different investment needs at different times of your life. When you’re young, and just starting out in your career, you may require a mix of long- and short-term investments.
You might need the short-term ones to help pay for a down payment on a home, while the long-term ones could be used to help build resources for your retirement. But later down the road, when you’re either closing in on retirement, or you’re already retired, you may have much less need for long-term vehicles, with a consistent increase in your need for short-term investments.
When it comes to investing, it is wise to compare the benefits and drawbacks of both short-term and long-term investments and choosing the one that best fits your current financial needs. It is also wise to find the right balance between you and your individual situation.
Thus, You need to have clear goals in mind as you, investing and sitting down with a financial planner can help you determine the best way for you to balance your portfolio. Your financial goals will help you determine the best course of action for your investments since when you need the money can also help you determine the amount of growth you need in a specific time frame.