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Short-term investments
Short-term investments are defined as placing free funds in various assets for a short period of time in order to get a quick return. If you make short-term investments, it is more often because you need to have money at a certain time. If you are saving for a down payment on a house or a wedding, for example, you need to have the money ready to go.
In other words, short-term investments are those made for less than three years. By choosing this strategy, an investor sacrifices potentially higher returns for the sake of greater liquidity.
Short-term investors most often:
- prefer to quickly invest and quickly withdraw money, experiencing a live profit;
- have a superficial understanding of the specifics of investing, do not know how to assess risks and influencing factors;
- “emotional adventurers. They want to get everything at once and as quickly as possible.
Financial instruments for short-term investments:
- money market funds;
- certificates of deposit;
- bonds with a term of up to three years;
- various kinds of HYIP projects.
The main objectives of short-term investing – to protect free money from inflation, to earn on a single event or gain experience investing.
But the security of short-term investments comes at a cost. You probably won’t make as much money on short-term investments as you will on long-term investments.
Long-term investing
Long-term investments are investments of assets for a period of more than three years, and to get tangible benefits from long-term investments, you need to plan them for several years. Long-term investments are made by more “mature” investors with a clear strategy and goals. As a rule, these are people who take care of the savings basket “for their old age”, begin to “play the long game”, also to earn for other purposes, such as buying real estate, a means of transportation, or saving for education.
Long-term investments are made in construction, intangible assets of long-term use and various securities from which income can be earned. For the most part, this applies to investments characterized by a sufficiently high stability, regardless of changes in the economic situation or fluctuations in the financial market. But, it is worth considering, investing everything in long-term investments, you lose the chance to make a profit on the volatility of the market.
Long-term investments yield higher returns. Here’s an example: Amazon stock was trading at less than $2 apiece when the company first went public in 1997. In recent years, Amazon Inc. stock has appreciated about 1,700 times its value in 1997, to $3,421.37 currently.
If you bought 500 shares of Amazon stock in 1997 at less than $2 per share, your investment to date would be about $1.7 million.
Peter Lynch points out that if you are investing for the long term now, you have to understand that the money you are investing is money you will definitely do without for a very long period of time, otherwise you will make irrational decisions. Lynch also believes that stock prices are fairly easy to predict over a period of 10 to 20 years, whereas short-term movements can only be tried to guess.
Important: Most long-term investments are not recommended for short-term investments. If, for example, investing in a fast-growing non-public company is a long-term investment, it should not be considered for a short-term investment.
How to determine which type of investment to choose?
Before deciding which investment strategy to choose – short-term or long-term – it is important to understand the goals you are pursuing. Without a goal, timings are not set, risks and returns are assessed inadequately, and you end up with situations in which you have to act irrationally.
Long-term investments imply investing that closes any goals that are somewhere far away in time – 10+ years. For example, to provide yourself with retirement capital, or to earn and save by investing money to solve some large and global problems, as well as personal goals.
If your goal is to buy an apartment in three years or send your children to school, that’s a short-term investment. But even if you are currently interested in short-term investments, set aside some of your money for long-term investments. This will reduce the risk of losing money due to a sudden market crash or the wrong investment instrument.
And remember that investments are a necessary part of wealth accumulation. You should not avoid them as if they were not your field. And you shouldn’t be afraid of them. It is better to study all possible options of short-term and long-term investing.
