Understanding long-term and short-term investments: Know which to use when

Pranati Deva
Updated: 15 Dec 2021, 12:50 PM IST
TL;DR.

Knowing and understanding when to use long-term investment and short-term investment can prove immensely helpful to fulfill the financial goals of an investor. Here’s all you need to know.

For a successful investor, it is very important to know when to use long-term and short-term strategies.

For a successful investor, it is very important to know when to use long-term and short-term strategies.

For a successful investor, it is very important to know when to use long-term and short-term strategies. The correct decision can help you grow your wealth in a way that helps you meet your financial goals.

Learning the advantages and disadvantages of long-term and short-term investing will help you clearly choose which or what kind of combination of the two is a better fit for your portfolio.

Putting it simply, short-term investment is when you hold any asset for less than a year. This time period could be days, weeks, or months. Meanwhile, long-term investment is when you hold an asset for at least 7-10 years. It aims to fulfill long-term goals like retirement, buying a house, college, etc.

Even though you get your money earlier in short-term investments, market analysts suggest that it is important for an investor to do proper research and decide their goals before choosing one or the other. What is preferred by one investor may not be the right choice for another. The decision should be in sync with your overall investment aims and you must take into account how much risk you are willing to take.

Let's understand these two better:

Long term

Long-term investments are generally in assets that you plan to keep for a while. Such investments are mostly common for retirement accounts, real estate investments, college funds, etc. They provide a good opportunity for growth over a significant period of time. These options grow at a stable and consistent rate, give you enough time to recover any losses that happen along the way and still reap results.

However, you must note that in this kind of investment you cannot access the money you invest for a long period of time. Hence, you must invest only the cash you can spare for such periods.

long-term investments are generally assets like stocks and real estate that you plan to keep for a while. They provide opportunities for growth in your portfolio because you know you won’t access the money for a significant period of time.

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When to use long-term and short-term invetsments

Short term

These are the investments you plan to use for a shorter period to fulfill your financial goals. Investors using this strategy generally use the volatility in the markets for near-term gains. Like long-term investment, most investment options can be also used in the short term like stocks, mutual funds, ETFs, bonds, etc. It is mostly used for assets that are very liquid and can be sold quickly.

These assets are typically volatile and preferred by investors with a higher risk appetite. Such investors also have a good technical knowledge of the equity markets to help them make the right call at the right time. While it can give great returns, the strategy can also lead to steep losses in case of the wrong call. Further, investors can miss out on gains, if the price of the asset rises later.

Difference

When to use

There are certain times when long-term investments make more sense than short-term investments and sometimes when the vice-versa is true. Long-term investments are generally preferred if you are saving for retirement or a future goal when you need a corpus after say 10 years for a college fund or to buy a house. It also helps you protect against inflation. Meanwhile, short-term investments are used when an investor needs cash in the near future. He/she bet on the market movements, technically analyses the stocks and invests. Mostly, intraday traders and active investors often prefer short-term investments.

Volatility

Short-term investments tend to be more volatile than long-term investments. They rely on market fluctuations to make a profit. While long-term investors can sit through the volatility and wait for their investment to recover.

Risk

Short-term investments are generally riskier because of the fact that they do not have time to make up for losses. Hence the investors may look for safer options like bonds to put in their money. Meanwhile, investors can take more risk in long-term investment options.

Investors

Passive investors generally prefer long-term investment while active investors like short-term investment. Intraday traders usually depend on market fluctuations to make a profit.

Returns

Long-term traders are known to get better returns than short-term traders. The main aim of short-term trading is the preservation of capital or outperforming markets in a short period of time which could be affected by global and local trends. Meanwhile, for long-term traders, it is only about growth. And since the interest gets compounded over the years, the returns are higher.

Now that we know when and how to choose long-term or short-term trading options, it will be easier to find which one perfectly fits your portfolio. An investor can have only short-term assets or any long-term assets as well as a mixture of both depending on your financial goals.

First Published: 15 Dec 2021, 12:50 PM IST
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