Short-term Investments

Building an investment portfolio requires clarity about what your goals are, how you feel about risk, and what kind of investments you want to make. You also need to know what your time frame is. Do you want to earn money quickly or do it for a long time? This will affect whether your portfolio focuses on short-term investments, long-term investments, or some combination of both. Knowing the difference between these types of investments, as well as the pros and cons of each, will help you make sure which investment strategy is right for you.

To understand this, you need to know:

What are long term and short term investments?
What assets are most suitable for long-term and short-term investments?
What are the advantages and disadvantages of each type?
What's better?

What is Short-term Investment?

Short-term investments are investments that are held for a relatively short period of time, usually no more than one year. They involve a smaller part of the investment portfolio with the expectation of profit in the short term.

In countries with developed economies and a stable exchange rate, short-term investments are considered to be investments for 2-3 years. And in countries with developing economies and an unstable national currency, a period of several weeks or even minutes can be considered a quick investment.

By short-term investments, many people mean precisely speculative purchases and sales of assets that are associated with price changes. Even among stock market professionals within one country, the opinion on the issue of the urgency of financial investments may differ. Some call short-term investments for a period of several months to a year, others – from a few minutes to 2-3 months. To narrow the concept of short-term investments, you can consider them as investments for up to 12 months.

Short-term investments, as well as long-term ones, differ in several ways:

by management style – active and passive;
by type of investor – conservative, moderate or aggressive;
by risk level – low, medium and high;
in terms of investment.

It is important to understand that most investors in the world are focused on long-term investment for more than five years. This allows you to calmly survive crisis periods and not change your investment strategy at the slightest downward movement of the market. Experienced investors know that the longer the investment horizon, the less the average annual return on financial investments fluctuates.

What Are the Features of Short-term Investments & How to Invest Short Term?

The main feature of short-term investments is high liquidity. That is, money is invested in something that can always be quickly bought or sold. For example, short-term assets are more likely to be bonds, investment funds, or bank deposits than real estate or precious metals.

There are two ways to invest short term:

Buying an asset is cheaper and selling it is more expensive: the greater the difference, the higher the investor's earnings. Investment objects can be any assets, except for bank products, since they cannot be sold to someone else.
Receiving current income from an investment: it can be dividends on shares or coupons on bonds. Investing with current income is called passive investing. Usually the asset is taken for the entire term. For example, a bond is bought before maturity.

Active investing involves reusable transactions for the purchase or sale of assets. Such a strategy can bring higher profits than passively waiting for the price to rise, but it is associated with higher risks. In addition, in order to make money on active transactions, you will have to constantly monitor the market, news and study a lot. If there is no time for this, the strategy will not bring the expected profit.
Where to Invest Money for Short Term?

There are many different types of short term investments which are:

Bonds: Bonds are debt securities that are issued by corporations and governments. As a rule, they are valid for one year or less.

Stocks: Stocks are equity securities that represent ownership in a corporation. They can be bought and sold on stock exchanges.

Mutual Funds: Mutual funds are investment vehicles that pool the money of many investors and invest it in various securities.

ETFs: ETFs are investment vehicles similar to mutual funds, but they are traded on stock exchanges.

Options: Options are contracts that give the holder the right, but not the obligation, to buy or sell a security at a set price.

Futures: Futures are contracts that commit the holder to buy or sell a security at a set price on a future date.

Commodities: Commodities are physical goods that are traded on commodity exchanges.

Currencies: Currencies are traded on the foreign exchange markets.

Cryptocurrencies: Cryptocurrencies are digital coins that are exempt from any influence from banks. To trade these assets, a crypto exchange or crypto exchange is used.

What Are the Benefits of Short-term Investment?

There are many benefits of short-term investment:

Short-term investing offers the investor flexibility because the investor does not have to wait for the right moment to buy a stock, as he can work with any price fluctuations.Investors can make significant profits in a very short amount of time.
The main advantage of short-term investments is medium or high liquidity. That is, investments can most often be withdrawn at any or a predetermined period. For example, stocks and bonds can be sold on stock exchange days.

What are the Disadvantages of Short-term Investments?

Short-term investing comes with high costs due to high transaction volume and related brokerage fees. Taxes and inflation also reduce the return on short-term investment.

This requires a certain level of knowledge and time, as investors must closely monitor price movements and determine where to buy and/or sell.

Most often, the disadvantages of investing in the short term include:

low profitability if a conservative risk-free strategy is chosen;
high risk if instruments with high potential returns are selected;
high costs if an inexperienced investor conducts many transactions in the stock market in an attempt to make money;
fewer instruments compared to long-term investment. For example, precious metals, bonds with long maturities, or currency transactions with periods of stability are rarely used for short-term investments, or such investments are less profitable.

What Are the Risks of Investing Money for a Short Period?

Short-term investments in securities differ in the degree of risk. For example, the purchase of short-term federal loan bonds is equal in terms of risk to bank deposits.

Investing in shares or corporate bonds of little-known companies is more risky: bond issuers may go bankrupt and not return funds to investors. Usually, stocks of young, actively growing companies are chosen to make quick money on the stock market. But this is a risky strategy for the short term: if the price of an asset does not rise, but falls, the investor will lose money.

Most often, analysts recommend sticking to a long-term strategy, because historically the market has always been growing.

What is Long Term Investment?

Long-term investments are investments that are held for more than one year. They involve a large part of the investment portfolio with the expectation of profit in the long term.

Long-term investing is a popular strategy for those who are willing to wait three, five, or even ten years. The basic principle is “buy and hold”. At first glance, it seems that this is an ideal version of a financial airbag, but this is not so: as sources of long-term investments, you need to choose funds that you definitely won’t need in the coming years (we already wrote about this here).

The strategy is suitable for those who do not want to delve into the intricacies of the stock market and constantly monitor changes. This is such a lazy investment, when the investor performs a minimum of actions and most of the time just passively watches. What is meant by long-term investments often justifies itself – in the horizon of several years, most markets grow.

Long-term Investment Features

Long-term investments and investments are not always synonyms, and the difference lies not only in the waiting time for profitability. What other features of this strategy:

The investor does not need to constantly monitor the state of the markets, look for shares of young and promising companies, "format" his portfolio of securities, and take any action in times of crisis.

The level of stress is minimal – the investor remembers that the shares of reliable companies are able to overcome any crisis, and the risk of bankruptcy of "blue chips" (the most reliable and highly liquid companies in the industry) tends to zero.

You can count on a stable income in the future, when the share price, dividend payments and the assets themselves grow in price.

Assets in long-term investment are most often stocks, bonds, ETFs. You can also invest in real estate, precious metals. In any case, for this strategy it is necessary to have a fairly large capital: the larger it is, the faster the investor will receive a return (for example, not in 10, but in 3-5 years). If we talk about the means of financing long-term investments, then for a private person, free (not borrowed) money will always be an ideal option. Alternative options are possible for the company – for example, borrowed or sponsored money.

What Are the Different Types of Long-term Investments?

There are many different types of long-term investments, which are:

Bonds: Bonds are debt securities that are issued by corporations and governments. As a rule, they are calculated for a period of more than one year.

Stocks: Stocks are equity securities that represent ownership in a corporation. They can be bought and sold on stock exchanges.

Mutual Funds: Mutual funds are investment vehicles that pool the money of many investors and invest it in various securities.

ETFs: ETFs are investment vehicles similar to mutual funds, but they are traded on stock exchanges.

Options: Options are contracts that give the holder the right, but not the obligation, to buy or sell a security at a set price.

Futures: Futures are contracts that commit the holder to buy or sell a security at a set price on a future date.

Commodities: Commodities are physical goods that are traded on commodity exchanges.

Currencies: Currencies are traded on the foreign exchange markets.

Cryptocurrencies: Cryptocurrencies are digital coins that are exempt from any influence from banks. To trade these assets, a crypto exchange or crypto exchange is used.

What are the Principles of Long-term Investment?

Do not buy shares of startups and young companies. It is better to pay attention to the assets of reliable companies – for example, the blue chips mentioned above.

Don't wait for stocks to crash. The “buy low, sell high” approach does not work here. The investor does not need to focus on temporary market fluctuations. In a long planning horizon, short-term falls and rises in asset values do not matter.

Diversify risks. This is a universal principle for most investment strategies.The more companies in the investor's portfolio, the less global crises affect the final profitability.

Buy shares gradually. Do not confuse long-term investment with direct investment - in the first case, you can periodically buy shares of new companies that suit your requirements.

Do not make sudden movements and be patient. If you have chosen for yourself long-term investment, abstract from thoughts about crises and sharp drops in the value of shares. A sudden sale of assets on a decline in value is rarely justified.

What are the Benefits of Long-term Investment?

There are many benefits to long-term investment:

Long-term investing takes less time because investors do not have to monitor the markets daily for small fluctuations.
Brokerage fees and capital gains taxes make up the bulk of the cost of investing, excluding the risk factor. Long-term investors are subject to transaction fees less frequently, if not at a lower rate, than short-term investors. Many investors can let returns build up in their bank accounts by deferring capital gains taxes. Capital gains taxes are also levied at a lower rate than short-term profits.

What Are the Disadvantages of Long-term Investment?

Long-term investments also have disadvantages:

By investing for the long term, investors are potentially missing out on other investment opportunities that may arise in the short term.
Long-term investments are subject to market risk, which means that the value of an investment may fluctuate over time. If the market falls, the value of the investment may also decrease.

What Are Better – Short-term or Long-term investments?

There is no definite answer to this question. Both short-term and long-term investments have their advantages and disadvantages. The best investment strategy for you will depend on your individual goals, risk tolerance and time horizon.

If you are looking for immediate income or profits, then short term investments may be your best bet.

If you are looking for long term growth or stability then long term investment is for you. Ultimately, the best investment strategy is the one that suits your individual needs.

Planning Long-term and Short-term Investment Strategies

Long-term investment strategies can help support major purchases or life events years or even decades from now. Because it often takes large sums of money to reach long-term savings goals, such as retirement or educating children, it can help you plan your investment strategy as early as possible.

Short-term investment strategies are usually developed for smaller goals, which may take months or several years to complete. Due to the shorter time frame, the types of investments suitable for short-term goals are usually different from the types of investments used for long-term goals.

Although they may have different time horizons and different tactics associated with them, long-term investment strategies and short-term investment strategies can be shaped in part by answering some of the same questions.

What is Medium-term Investment?

Medium-term investments are investments with a term of one to five years. Most investors do not classify medium-term investments as a separate category. In such cases, it is customary to consider that long-term investments are investments with a period of one year or more.

Medium-term investment objects

With medium-term investment, funds are usually returned within up to 3 years. Most often, the object of medium-term investments are:

securities;
stock;
bonds;
long-term bills;
bank deposits;
non-current tangible assets;
precious metals;
real estate;
branches;
affiliated companies.

The most common objects are securities and precious metals.

Investing in securities does not require the investment of large amounts, however, one should not expect a large profit from such an investment. It is advisable to invest at a time when rates are stable or declining.

Investments in precious metals guarantee the safety of capital, ensure the safety of funds from inflation and asset depreciation. The most common metals are gold and silver, prices for which are constantly changing, most often upward. Leasing is also an example of effective medium-term investments.

Leasing is a process of investing available funds on the basis of a financial lease agreement, in which the lessor buys property for the lessee, and the lessee pays rent for this property for some time, after which he undertakes to buy it back.

The subject of leasing may be movable or immovable property allowed for free circulation on the market, belonging to the class of fixed assets.

Medium-term Investment Benefits

Medium-term investments are in great demand due to the absence of high risk, the presence of a fairly high reliability and the amount of profit received.

The payback period does not take too long, the income received in a short time can be immediately directed to the implementation of new investment projects. At the same time, unlike short-term investments, medium-term investments involve a large capitalization of the invested funds. These investments stimulate the development of stock markets and the economy as a whole.

Medium-term investments allow both investors and companies whose shares have been recognized as profitable to develop simultaneously. Investors get the opportunity to influence the activities of companies, their profitability means growing investor income.

Many investment objects, such as investing in bank deposits, are insured against possible risks and allow the formation of a "financial safety cushion". That is, medium-term investments are not aimed at making a profit in a short period, but at a stable income for a long time.

Questions to Ask Yourself Before Forming an Investment Strategy

How much money you'll need: For example, if you're saving for retirement, you'll probably want to take into account your life expectancy, desired lifestyle after retirement, and health care needs, among other factors.
How will taxes affect your investment strategy? Like inflation, taxes can have a big impact on your investment strategy.

When will withdrawals start? This is another way to determine what your investment strategy will be. For example, if you are saving money for your child's education, you can assume that the savings will start in the first year of university.

How long will withdrawals take? You may prefer not to end a long-term investment strategy with a one-time withdrawal. However, for short-term purposes such as vacations, you can withdraw the lump sum.

Will you invest all at once or periodically? When calculating the maximum amount you can potentially reach by the end of your savings goal, you need to take into account the frequency of deposits to your investment account. For example, will you invest a lump sum up front? Will you deposit a certain amount at the beginning of each year, or will you deposit a fixed amount each month?

What types of investments will you use? The types of investments you use can be chosen depending on your desired rate of return and your risk tolerance. The amount of time you should invest can also help you decide what type of investment to make.

Your time horizon or the number of years before the start of the withdrawal of funds from investments is one of the determining factors in choosing the right types of investments. It is important to note that investors should also consider their risk tolerance when choosing investments.