Before diving into long-term vs. short-term investments, we must define what an investment is. Investing is allocating money toward something you believe its price may appreciate in the future.
Whatever you generate back (or don’t) is called a return, be that a positive return or negative. Returns can come in different forms: dividends, rental income, or a mix of capital gains & dividends. It’s important to note too that the fluctuations in currency exchange play a role in identifying your real return rates.
Short-term investments
Short-term investments are those which are expected to be sold within a year’s time. Those include securities like stocks & bonds. And while short-term investments usually generate lower returns, they are highly liquid, allowing investors to turn them into cash relatively quickly.
Examples of short-term investments
Some examples include mutual funds & treasury bills. As for stocks & bonds, they too can be held for a short period of time (a year or less).
Stocks come in two forms: common shares & preferred shares. Common shares give investors ownership in the company, voting power, & eligibility for dividends. Preferred shares give investors priority in receiving dividends distributed by the company, but do not offer voting rights.
Bonds also come in two forms. 1) government bonds, which are issued by the government as a source of financing, & 2) corporate bonds, which are also a form of financing for companies, & allow investors to receive periodical coupons.
Characteristics of short-term investments
Quality short-term investments share
- stability in value of investment
- higher liquidity
- low entry & exit costs
- not much initial capital needed
Advice for short-term investing
- Determine your risk level: assets with higher risk could lead to unwanted outcomes.
- Get to know short-term investment instruments: this allows you to better pick between them
- Align your planned investment periods with the right asset
Long-term investments
Like short-term investments, long-term investments are also prone to both the upside & the downside. You can invest for the long-term by buying stocks of companies you believe in, or by investing in assets that would generate income such as commercial operations of a business.
Examples of long-term investments:
Real estate
Real estate is considered one of the best long-term investments. You can purchase real estate directly in the form of residential houses, warehouses, or commercial real estate, & renting it for passive income or selling it for capital gains. You can also invest in real estate indirectly through Real Estate Investment Trusts (REITs).
Stocks
Stocks are a suitable option for those who don’t want to get into the legal paperwork of buying real estate. You can simply purchase stocks in a company you believe are successful or will be in the future. It’s best practice to diversify your stock portfolio to decrease risk levels. Stocks are also highly liquid & easily accessible.
Mutual funds
Mutual funds are pooled investments managed by professionals. These funds then invests the money in whatever asset class(es) it was made to invest in, be it stocks, real estate, or others. This option is best for those who don’t have time to manage their own investments.
Retirement funds
Similar to mutual funds in that it aims to achieve certain goals, however retirement funds aim to achieve goals by retirement age. These are provided by workplaces, & can be purchased externally.
Foreign currency
Trading currencies takes place in the Forex market, which is different than the stock market. Forex markets are known to be efficient, meaning there’s little room for manipulation. Like stocks, it is also easily accessible.
Commodities
You can invest in commodities like gold & oil with the same goal of seeking capital gains. These are commodities that are high in demand, & finite supply.
Strategies for long-term investments
- Have a plan with a defined goal that aligns with your investing period
- Diversify over several assets & sectors
- Avoid panic selling during market downturns
- Invest consistently, & invest your dividends
- Monitor your investments
- Know your risk tolerance & the appropriate assets
* This article was not written by Thndr and does not constitute investment advice. You should do your own research before making investment decisions.
