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The Difference Between Long & Short Term Investments

investment

When it comes to investing money, you have two main paths to walk down: 

  • Long-term investments
  • Short-term investments

Today, we’re going to look at the differences between the two – other than the obvious fact that one is longer than the other! In doing so, you will learn which path makes the most sense for you at this current moment. Some people are better suited to long-term investments while others may benefit more from short-term ones. It depends on your financial situation, but the first step is understanding how both paths differ. 

So, without further ado, let’s look at long and short-term investments! 

Long-Term Investments

A long-term investment can be defined in different ways. Some experts define it as any securities that are held for more than a year. However, other financial experts don’t agree that this is long enough to classify as a long-term investment. 

Instead, the more general definition is that it’s an investment lasting for five years or more. 

You invest money in something and don’t sell it for at least five years. That’s generally long enough for something to be in the long-term bracket – and it also means that some investments are more suited to this than others. In this section, we’re going to list some of the main features of long-term investments, so you understand what to look for. When we do the same for short-term investments, you can make quick comparisons between the two. 

Steady Gains

The hallmark of a long-term investment is that it generates steady gains year after year. You aren’t looking for something that will instantly double or triple your investment within a few months. Instead, it’s more about gradually increasing your returns over a longer period. A retirement fund is a fantastic example; you don’t earn a huge amount per month, but over the course of a few decades the earnings add up. 

Low Risks

In conjunction with steady gains, long-term investments usually have a low level of risk. Funnily enough, that’s what allows them to produce steady gains. A high-risk investment could yield a larger annual return, but there’s no guarantee this will remain the case for years to come. As a result, you want to opt for investments that are more reliable and don’t present a massive risk for your money. Usually, you should feel comfortable that you are going to generate positive returns after at least five years. This means you want to avoid investing in things that can go up and down like crazy – such as Forex trading

A Proven Track Record

Lastly, long-term investments tend to have a proven track record. We mentioned steady gains and low risks, but how can you be sure that something will provide both of these? It’s simple; look at an investment history. Some assets have proven time after time that they grow in value over the course of many years with a very low level of risk. For example, real estate is comfortably one of the best long-term investments. Housing markets show that properties typically rise in price over time, so you’ll almost always sell your house for profit. The same can be said of high-interest savings accounts or an asset like gold. Look at gold prices over the years and you’ll see it generally increases with time. 

When an investment has a proven track record, it can be great for the long-term approach. You’ll suit this approach if you want to invest a little bit of money regularly. You’re happy to put some aside in an investment that works in the background. Eventually, you’ll come back to it and cash in on the profits. 

Short-Term Investments

Based on the definition of long-term investments, we can confidently say that a short-term investment is anything that isn’t held onto for more than five years. The aim is to cash in on this investment within that period, though most people will be thinking on a shorter scale. You have individuals making short-term investments that last a few hours – this is often called day trading – and you have some who make them for a few months. 

When you take a deeper look at short-term investments, you’ll notice the following traits: 

Huge Gains Over A Short Period

Here, the aim is all about making money quickly. You don’t want to sit on an asset that’s likely to present a steady yield over decades. Instead, you’re after things that offer huge gains over a short period. Investors want to buy assets when they’re not worth much, then sell them as they hit a spike quite quickly. We mentioned it before, but Forex trading is very popular in this regard as many currency pairs can spike in value very quickly before going back down again. Some stocks and shares fit this description too – you need to invest in stocks that are likely to increase in value quite quickly before hitting a ceiling. 

High Risks

Long-term investments have low risks because they’re designed to sit in the background and slowly generate money. If you want to earn cash as quickly as possible, the only option is to find high-risk investments. Things like investing in Bitcoin are a prime example – there’s a lot of volatility in the crypto market, but this can be used to your advantage. If you play your cards right and invest at the right moment, you can earn major profits within a few days, weeks or months. 

We could also throw property flipping into this high-risk category. While general real estate investments offer long-term gains, you can take a risk and purchase a house that requires extra work. Here, you’re investing more money to fix the house, hoping that it grows in value. When done correctly it becomes a great short-term investment that can provide cash profits within months. 

Conclusion: Which Investment Is Right For You?

Long-term investments are catered to people with the future in mind. If you’re planning for retirement or wish to save for a goal in a few years, this is the best approach to take. It’s also a wise tactic if you don’t want to take risks and are happy to sit back and watch things slowly progress. 

Conversely, short-term investing is for individuals with the financial capacity to take risks. You want to increase your income and make profits quickly, and you can also do this without putting your personal finances at risk. 

Either option could be ideal for you – just be extra sure you read through them both and understand which approach suits your financial situation. 

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