Compare short-term investing vs long-term investing and determine the best approach for your financial goals in your wealth planning.
If you are looking to invest as an expat or high-net-worth individual, which is what I specialize in, you can email me ([email protected]) or WhatsApp (+44-7393-450-837).
Overview
Investments are of two types based on the time horizon: short-term investing or long-term investing.
You might even have heard about medium-term investments, yet it varies from investor to investor depending on various factors. Such factors include investment goals, specific time-frame, etc.
A short-term investing is usually for an asset you hold for a period ranging from less than one day to one year. Some people such as traders usually trade multiple times within a day. This is done with the objective of trying to make a profit from volatility and short-term gains.
On the contrary, A long-term investing refers to a situation where you hold for a period of more than one year.
In most cases, long-term investors hold their investments for many years as part of an investment strategy for their portfolio.
Short-term investments are extremely liquid in most cases. This usually allows investors to purchase and sell such assets quickly and without any trouble. Some of the common types of short-term investments include stocks (day trading), options and CFDs.
Common examples of short-term investors are day traders and active traders, who can be seen actively participating in short-term investments.
On the other hand, long-term investments are the investment vehicles you hold for more than a year. In most situations, investors hold these assets for a couple of years or more at a given time.
Such investments are built into their portfolios while being tailored based on a specific strategy.
Some common examples include (but are not limited to these):
— Real Estate
— Long-term savings accounts (like fixed deposits with tenure of more than a year)
— Bonds with a tenure of more than a year
— Stocks purchased for long term
Long-term investments are generally expected to rise in value in a relatively stable manner in the long haul. This makes them better financial instruments for an investor to hold for several years.
One of the most common types of long-term investment is an investment made in real estate. Many individuals purchase houses as an investment opportunity, which will be held by them for a few years. Some might even hold them for decades, which allows the property to experience capital appreciation hopefully.
Some other general long-term investments include investment assets such as mutual funds or bonds.
How to Make a Decision: Short-Term Investing vs Long-Term Investing
Investment Goals
When an individual has a long-term goal, it is wise to go ahead with a long-term investment. For instance, in order to purchase a house worth $millions, the investor should consider a long-term investing.
This allows them to gain the resources (funds) deemed necessary for their goal, i.e., buying a house.
A short-term investing would be ideal for investors when they have short-term gains. For example, when someone required a particular amount of money at a specific time, which can be for buying a car or going on a vacation.
Risk Tolerance
It is possible for you to get your hands on a lower-risk investment like government bonds or a certificate of deposit. On the other hand, there are certain risky investments such as making an investment in new companies (start-ups).
You should always keep in mind that any investment asset would generally offer higher returns when the risk involved is higher. In other words, the risk is proportional to the returns when it comes to investments.
If your risk tolerance is high (aggressive), you may consider short-term volatile investments with a certain portion of your money.
However, if you are not willing to take loss in return for a potentially higher gain, you better choose a more conservative long-term investment.
Most investors, especially experienced ones, diversify their investment portfolios to manage risks, though.
This allows them to have access to both short-term and long-term investments and results in a situation where they can make profits from both endeavors.
Usually, the risk profile of a person is based on two main characteristics: their age and their financial situation.
People who are young or have a significant amount of wealth are considered to have a robust risk profile. This would mean such an investor is more willing to take losses that may occur from the investments.
A young person has a lot of time ahead of him/her, and this would give them the time needed to regain wealth they’ve lost. People with a large amount of wealth are better equipped with cushions to rely on in recovering from the loss.
On the contrary, let us think of a person who is near the retirement age or has a limited amount of wealth. They are less likely to be fine with investment losses.
This is because they do not have enough years ahead of them, or capital to regain the funds to use for their retirement or investing.
Which is better: Short-term investing vs Long-Term Investing
Short-term investments like forex, options trading, CFDs, etc., are usually traded for very short time frames.
When you are not completely aware of the market situation, you will miss the point where you must have exited. In other cases, you will panic and exit your position before you start making profits.
One thing to remember here is that panic gets the best of investors, even long-term investors.
Imagine what happens to a short-term trader when such a circumstance arises when they’re not completely aware of what to do.
To make things worse, imagine what would happen when you are in the middle of something important and have to deal with this situation.
That’s why short-term trading is only suitable for you when you have the right amount of expertise and the necessary time.
Another major backdrop of short-term investing is that you may miss out on the gains you could have had if you stayed invested for a longer time frame.
Bottom Line
A portfolio should be balanced as well as diversified, to make the most from your investments.
Through a balanced and diversified portfolio, you will be allowed to hedge against losses that happen within, for example, a specific time frame or sector and make profits.
Remember that investments usually involve a certain amount of risk.
If you are looking to invest as an expat or high-net-worth individual, which is what I specialize in, you can email me ([email protected]) or WhatsApp (+44-7393-450-837).
This includes if you are looking for a second opinion or alternative investments.
Some of the facts might change from the time of writing, and nothing written here is financial, legal, tax or any kind of individual advice, nor a solicitation to invest.
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Adam is an internationally recognised author on financial matters with over 830million answer views on Quora, a widely sold book on Amazon, and a contributor on Forbes.
