Long-Term Vs. Short-Term Investing

There are several considerations to make before deciding what to buy, including your objectives, time frame, risk aversion and taxes.

If you know that you will want your savings available in three years, then short-term investments are a very tempting choice. In fact, they are also deceptively dangerous.

Time horizon

How far into the future you think about your investment strategies, when you’re deciding what money you ought to be putting to work and what money you’d rather keep safe, is a critical aspect of your risk formula and the window in time through which you set your goals. ‘You should revisit time horizon periodically,’ says Hewins. ‘It’s an evolving estimate, especially as time goes on and your age changes. Life means you have some – hopefully – new financial goals. The other trigger is when the market takes a dip.’

Long-term investing refers to buying assets for a period of years or decades; in return you get the opportunity for growth over the long term, but you need to be comfortable bearing more risk.

Short-term investments are for funds that need to meet an immediate financial goal in the next year or two and that will need the cash soon. They can consist of investments that act like cash at hand, such as money-market funds or certificates of deposit; or can be riskier, including stocks or equity mutual funds.

Risk tolerance

Although a short-term investment has advantages and disadvantages, so too does a long-term investment. Depending on your financial goals, risk tolerance and time horizon is the right investment strategy for you. Before choosing an investment plan, it’s best to consult a financial specialist to explore investment possibilities, in a way that effectively addresses your individual needs.

Short-term investments such as certificates of deposit (known as CDs) or money market accounts and high yield savings accounts are accessible and offer stability, although they are not guaranteed to gain in value during the period of your investment or to protect principal value over time.

And short-term investing could work well for a saver trying to build a vacation fund or a summertime home improvement project, but only if the investment horizon isn’t terribly long, if early withdrawals aren’t subject to penalties, and if the returns are better than for long-term investments. Longer-term investment strategies include bonds – along with mutual funds and exchange-traded funds – that will lower the investment volatility while still, it could be hoped, taking advantage of the power of compound interest over the longer term.

Taxes

Next to time horizon and risk tolerance, tax considerations are the most important issues to think about when it comes to designing both a short-term and long-term investment strategy. Investors should consider how both current and prospective tax rates would affect an investment strategy.

Money market mutual funds and high yield savings accounts allow short-term investors to increase their funds more quickly, without taking the risks associated with stocks and bonds. Such flexible investments yield higher returns than time-value-of-money investments, and avoid the risks of growth investments. Short-term investors are aware that they might have to pay taxes on their gains at the ordinary income rate instead of the lower capital gain tax rate.

Investing is one of the best ways to accumulate wealth while managing your risk. However, before choosing an investment strategy, it’s important to consider your personal goals, the risk you’re willing to take, and your tax considerations. Spending the time to plan an investment strategy will help you achieve those goals faster while strengthening your long-term financial situation. To learn more about investing, talk to your local registered investment adviser, such as SoFi Invest.

Liquidity

Liquidity is a measure of how quickly an investment can be turned into cash. This is an important measure for an individual investor, or a corporation hoping to monetise some of their investments quickly such as a savings account or high yield savings account. A money market account also has a relatively high return with a moderate level of liquidity, but it will take a bit more time to withdrawal, maybe about 24 hours. A short term certificate of deposit (CD) or Treasury bill also takes a minimum of 24 hours to convert into cash. Longer term investments might require some patience, but they are typically lower risk than short term investments.

Short-term investors usually look at the low share prices when making short-term investments, the expected growth in industry and also daily price movements. They mostly follow buy-and-hold strategy and also viable investing principles when taking decisions.

To minimise their risk from market ups and downs, long-term investors can take out dollar cost averaging strategy by contributing a fixed amount on a periodic basis. With this strategy, if the market is down, savers will be contributing a larger amount of dollars for a fixed sum of their savings, consequently minimising risk and smoothing out their contributions in the long run. Even though dollar cost averaging might not be appropriate for all, care and advice from a professional financial advisor is always welcomed.