Knowing when to employ long-term and short-term investments to help you accomplish your objectives is an important element of building your wealth. Learn about the advantages and disadvantages of long-term vs short-term investment, and which choice is best for your financial future.
Lengthy-term investments are ones that you expect to retain for a long period of time.
Are Long-Term or Short-Term Investments Better?
Long-term investments, according to Wendy Liebowitz, vice president of Fidelity Investments’ Fort Lauderdale division, are assets such as stocks and real estate that you expect to hold for a long time. They allow you to develop your portfolio since you know you won’t need the money for a long time.
There are a few occasions where long-term investments are preferable over short-term ones.
Your Retirement Is More Than 20 Years Away
If you’re more than two decades away from retirement, there’s still a long way to go until you quit working. Long-term investments, such as equities, are a good asset class to create wealth over decades since they require time to grow.
“You have more space to make errors and time to recover from market downturns when you’re younger,” Liebowitz said. “Investing in stocks can help you accumulate money for the future. You may modify your asset allocation as you move closer to retirement to include other assets.”
You Need a Plan for Seven to 10 Years in the Future
According to David Stein, a former fund manager and author of “Money for the Rest of Us,” another factor to consider is your timetable. Low- and medium-risk portfolios are common in financial strategies for the next seven years. However, if you get into the seven- to ten-year range, you should start thinking about riskier investments, Stein told The Balance over the phone.
“In general, long-term assets like equities may be used for money you don’t need for a longer length of time,” Stein added. “It’s critical that you stick to your schedule.”
Stein suggested that you think about when you might need the money and that dividend stocks are a good option for medium-term goals that might benefit from regular payouts.
You Want Protection From Inflation
Long-term investments may also be preferable if you want to beat inflation or be protected from it. Long-term investments, such as stocks, are typically seen as less secure than other assets, but they provide a higher potential rate of return over time, giving you a better chance of preserving your purchasing power.
Another long-term option, according to Stein, is to purchase I-bonds. These are Treasury bonds with a set rate of return that also keep up with inflation. These bonds are typically meant to yield interest for 30 years, however, you can redeem them sooner.
“I-bonds alone probably aren’t enough to completely fund retirement, but they can be part of a long-term strategy,” Stein said.
When to Pick Short-Term Over Long-Term Investments
According to Liebowitz, short-term investments are ones that you aim to utilise to achieve financial goals in a shorter time frame. Rather than building your portfolio, you may require the funds to offer a steady source of income.
Bonds, cash, and annuities are examples of short-term investments. There are several circumstances in which short-term investments make sense.
You Know You’ll Need the Money Soon
Short-term investments may make sense when saving for shorter-term goals, such as a down payment on a home. Certain bank accounts, for example, can provide a guaranteed rate of return (although a low one in most circumstances) as well as the ability to withdraw funds whenever you need it.
According to Liebowitz, “in general, these sorts of investments are deemed less risky.” “You may retain money in a money market mutual fund or short-term bonds and expect to be able to use it for a short-term purpose without worry of a market loss.”
When it comes to liquidity, or your ability to access the money you’ve invested, market loss is a big influence. You may lose money if you choose a volatile choice like stocks.
If you need money quickly but want to make returns in the interim, a CD ladder is another choice. Before you deposit your money, however, familiarise yourself with your bank institution’s withdrawal policies and penalties. If you want to terminate your CD before the end of its term, certain banks, for example, may force you to forfeit part of your earned income.
You Want a Regular Source of Income
Short-term investments are frequently linked to a steady income. When you know you’ll need consistent income, investing in high-rated bonds and other assets can assist. While the return isn’t as large as it could be with some stocks, you have a better chance of dependable income.
Annuities, according to Liebowitz, can fall into this category for some people. “While not for everyone, the proper contract can provide you with consistent revenue for short-term requirements.”
Annuities, on the other hand, offer their own set of advantages and disadvantages. They can, for example, give lifelong income, assured growth (for fixed-rate annuities), and tax deferral, but they generally come with hefty costs, surrender charges, and can result in tax difficulties.
Final Word for Long-term or Short-term Investments
When developing an investing strategy, you must evaluate both long- and short-term objectives and select investments that represent your goals. Finding the right balance is crucial to building a portfolio that works for you.
- Long-term investments are ones that allow you to develop your portfolio and achieve your objectives over several years, if not decades.
- Short-term investments are intended for short-term purposes and can give access to returns that are deemed safer.
- In your portfolio, you should have a balance of long-term and short-term assets.