When we make reference to investment plans; there are usually two prime options available: short-term investments or long-term investments. When we, however, take a glance from a professional lens, there’s only one option available. If it comes down to full-fledged investment, some experts argue there is no such thing as short-term investments. They would rather regard such activity as ‘saving’. The onus of the argument lies in the fact that; investing in the long term has the highest returns.
It is noteworthy to mention that short-term investments aren’t entirely worthless. As a matter of fact, they serve a niche of investors with two-pronged interests. Short-term investments are available as backup; say you’re not looking to invest in the long term. We shall consider these investment forms in detail and examine the considerations for each. We also discuss how to find the right balance between short-term and long-term investments.
What Are Short-Term Investments?
Short-term investments are what investors resort to in a bid to cover a limited period of time; arguably between 3 years or less. The question of determining what investment type to adapt depends on the longevity of your financial goals. Short-term investments are available as high-yield savings accounts, government bonds, treasury bills and the like.
Here’s what we like about short-term investments: Investing in the short-term provides you with the opportunity of protecting capital while you generate similar returns. Say you have a short-term investment account, for instance, you can invest excess cash in government bonds. While you are at this, you can generate higher interest than what would be earned from a normal savings account.
What Are Long-Term Investments?
Investments in the long-term ideally represent stocks, real estate, and the likes. While short-term investments are susceptible to being sold within a year or so, long-term investments may not be sold for years. A long-term investment is largely associated with risk-taking. It suggests that you have enough capital available to lock a certain amount for a period of time.
Long-term investments are suitable for investors looking to save for a long-term goal. This could include saving for a college fund or a retirement, as opposed to saving for a vacation which is in the short-term.
What are the differences between Long term and short term investing?
Below are three major differences between long term and short term investing:
1. Goals
Usually, long-term investing goals take years to attain and may include saving for college and retirement. However, short-term investing goals take months or a few years to attain. A typical example of short term investing goals is saving for a wedding or vacation
2. Time Horizon
The length of time before you start withdrawing from your investment account determines your time horizon. Basically, long term is defined to be 10 years or more, while short term is considered to be three years or less.
3. Market risk factor
Market risk is the tendency for assets in the market to lose their value. The type of investment involved and your strategy determine the level of market risk. When you are determining the type of investment you wish to go for, discuss its market risk factor with a financial professional.
How can I plan Long-Term and Short-Term investing strategies?
Long term investment strategies can facilitate major life events that are decades away. Long term saving goals like retirement savings also require a large amount of money. Therefore, it is necessary for you to plan your investment strategy beforehand.
On the other hand, short-term investments strategies are for goals with a shorter duration. Therefore, the strategies you can use to achieve short term are different from the strategies to achieve long-term goals. These different strategies are formed by answering the following questions:
1. How much money will be enough?
You need to make related assumptions to answer this question. Let’s assume you are saving for retirement, you will need to consider your desired retirement lifestyle as well as your life expectancy.
2. What effect does taxes have on your investment strategy?
Taxes can have a big impact on your investment strategy because their prices fluctuate. You have to consider using accounts that have specific tax features.
3. When will withdrawals start?
This simply means the duration of your investing strategy. For instance, if you are investing in your child’s educational fees, withdrawals will start once they get accepted into college.
4. How long will withdrawals last?
You need to consider the duration of your investment withdrawals. For a long term investment like retirement, you have to make withdrawals in bits for your savings to last. However, for a short term investment like vacation, you can withdraw all your savings at once.
5. Will you make a recurring investment or invest in a lump sum?
You need to consider the frequency of your investment. This helps you to calculate the total amount of money you can come up with at the end of your savings.
6. What investment type will you use?
Always choose your investment type according to the return rate you want and your level of risk tolerance. Also, your investment type should depend on how much time you have to invest.
The questions above will ensure that you pick and plan for the right investment strategy.
Who should consider Long term investment strategies?
Anybody who has a long term savings goal can make use of long term investment strategies. Generally, long term goals are at least 10 years away. These strategies may be considered by investors who wish to do any of the following:
1. Save for higher education
Higher education gets more expensive by the day. Therefore, long term strategies can act as an important tool towards covering its expenses.
2. Accumulate wealth
Long term investment strategies focus on helping investors to grow their money over time. It maximizes the length of time spent to achieve this goal.
3. Save for retirement
Your retirement is the largest and longest financial goal of your lifetime. Retirement is a common reason people use long term investment strategies.
However, long term investment strategies are not for all investors. People who have a low tolerance for investment risk should consider other types of investment strategies.
Who should consider short term investment strategies?
Individuals investing for goals that are less than 3 years can consider a short term investment strategy. Basically, this type of strategy may be used by individuals who are saving for:
1. Home investment
A home is a very important aspect of everyone’s life. People who are saving for a home renovation or can apply short term investment strategies to achieve their goals.
2. Gifts
People who decide to save towards purchasing a gift focus on short term investment strategies. Typically, the saving duration for a gift is not longer than 3 years.
3. Vacations
People plan vacations ahead of time to avoid accruing debt. They prefer to save up money beforehand to fund their next vacation.
Lastly, people saving up for weddings use a short term investment strategy. This strategy is ideal because savings for weddings do not take a long time.
Conclusion
When it comes to investing, it is important to find the right balance. An investment goal is what fuels the direction of an investment kind. Also, it is possible to concurrently run both short-term and long-term investments. When you set out to do this, you can allot a meager portion of your budget to short-term investment.
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