Long-Term v/s Short-Term Investment: Which is Better for Your Financial Health?
Typically investing is not an easy and quick “get wealthy” tactic, which you can practice for a short duration and expect to earn a considerable amount of funds. Generally, it is a long-term procedure, which needs commitment, patience, and staying calm during market fluctuation, as it will obviously.
If you researched even a bit regarding investments, you may have a clue of what short-term and long-term investments are. However, if you are not very sure about what they exactly mean, their difference, and the best investment strategy, you have landed at the right place.
Let us see the meaning and the difference between short term and long term investments.
The Short-Term Ones
As the name suggests, these investments are generally sold after keeping them for up to five years. Some of the investment tools available for short-term include stocks, short-term bonds, certificates of deposit, and more.
You may have come across the term day traders, which is used for short-term investors. Before you get into this category of investment, work on the basics of the stock market. Be careful of the single-stock purchases, and remember it is very hard to earn higher returns as compared to the average return rate of the stock market when you trade in short-term investments.
Moreover, you should be careful about not putting all your investments in only one company. In case that particular company goes into loss, then you can lose all your investment. You must diversify your risk by spreading the stock investments to a variety of industries and kinds of companies.
Usually, it is easier to select some of the mutual funds, which are already spreading the risk on your behalf by purchasing different kinds of stock. Finally, you must invest those funds, which you can afford to get rid of, not the funds that are to be paid as a mortgage in the coming month.
The Long-Term Ones
The long-term investments are the vehicles, from which you can expect to pay off after you have held them for a duration of many years. While making an investment for the long-term, you can afford to be more aggressive as you will have a longer duration of time; hence, you can opt for an investment in an aggressive mutual fund for reaping the highest return rate.
The investments for the long-term can be approached by determining the returning rate you expect, then finding a mutual fund, which averages that returning rate over a period of 5-10 years. While making an investment for the long-term, you should not panic about the drop in the value of stock and avoid selling off your investment when the market seems to be bad.
The financial market is cyclical and will recover from drops always, although it might take some time in doing so. But if you pull your investment out when the prices are low, you may end up losing a part of the money you invested initially. It will help you if you do not look into your portfolio often. If there is a drop in the market, be patient, and do not pull your funds out. Wait for the stock prices to recover with time.
While deciding the amount of risk you can take, remember the longer you have to make an investment, the larger would be the risk you can bear.
If you want the funds in the upcoming years, go for an approach that is more financially conservative to the investments. You should invest in a secure kind of investment in such a case.
The long-term investments can be more suitable for investors who wish to save for their long-term objectives like college funds, retirement, and more. You will not be able to earn a huge amount of return in case you invest your money into a long-term plan, which you would be selling in the next 3 years, or if you wish to make use of the funds for short-term goals such as a vacation.
Long-Term v/s Short-Term Investing
Whenever you want to invest your money, one thing that you must be clear about is- what do you expect out of it and what is the purpose of your investment? Depending on the answer to these, your next decision should be if a long-term plan makes more sense as per your current scenario or a short-term one. Here is a pointwise analysis on which one to invest in.
1. Diversification is the Game
In the case of short-term plans, the risk factor is higher. It becomes worse if you invest all your funds in one spot. Invest portions in different plans and products as well as different companies so that you do not end up losing all of it instantly when the company faces loss.
2. Your Age Factor
In case you are about to start investing and the age factor is in your favour, then a more ideal thing for you to do would be investing for the long-term. If you are already retired then go for short-term plans. Long-term in the latter case does not make sense because you may need money in the near future for health reasons or for that dream trip that you wanted to go on after your retirement.
3. Determine a Pace
In the case of long-term investments, you can invest aggressively because the risk of losing money is comparatively less. In case the market crashes, you will have time waiting for the market to recover. Long-term plans give you the luxury of time. This is not available in the case of short-term plans.
4. Keep in Mind the Risk Involved
We cannot ignore the fact that even long-term investing plans come with risks too. Since you have the luxury of time in this case, the fluctuations in the market become quite unpredictable. The short-term plans involve the risk of not providing enough value of return when adjusted with respect to inflation.
5. Decide on the Basis of your Objectives
In case your objective can be fulfilled in the long-term, such as leaving behind a legacy for your children, save for your kids’ education fees, save for your retirement, and more, a long-term plan will be more suitable for you. Whereas, in case your objective is nearsighted, like purchasing a car, covering your wedding cost, etc. then short-term plans should be your choice.
The solution to your confusion regarding whether to opt for long-term or short-term plans is simple. You must try to look for an appropriate balance between these two. You can invest that money in the short-term, which has no qualms of loss. Simultaneously, keep a significant amount of money for the long-term plans. By doing so you can enjoy the best of both worlds! And the worst that can happen would be the worst of only one out of the two.
It is All About Striking the Proper Balance
Whenever you talk about investing, it becomes essential to strike a correct balance for yourself and your situation. Before you begin to invest, no matter short-term or long-term, you must have clear objectives in your head.
Even in the case you are interested in making short-term investments, keep a portion of your money aside for long-term plans. This will ensure protection for you in case you suffer some loss due to a sudden crash in the market or a bad investment. Investment is an essential tool for building wealth and not something one should be scared of.