When it comes to investing, it can be difficult to know if you should make your money work hard for you in the short term, or if it’s better to put it into a more lucrative long-term investment.
On that note, let’s take a look at short-term and long-term investments and ascertain which is better!
Table of Contents
What is a Short-Term Investment?
A short-term investment is an investment that takes a short period before reaching maturity. Most of the time, short-term investments are easily transferable and can be liquidated promptly if the need arises.
The time frame for short-term investments is usually less than a three-year period. Liquidity means that an investment can easily be converted into cash.
Examples of short-term investments include money markets, day trading stocks and treasury bills.
To determine whether a short-term investment would suit your situation, you have to consider factors like your income, cost of living, dependants and tax.
And if you find yourself struggling to do that, then it would be best to draft up a list of questions for your financial advisor in order to get clear-cut financial advice tailored to your situation.
Advantages of Short-term Investments
Speed
One of the advantages of short-term investments is that profit can be accumulated in short periods of time and you do not have to keep funds tied up in one investment for a long period.
For instance, if you invest in a short-term play, you can typically make your money back (and more) in mere weeks and months if things go well, as opposed to years with long-term investments.
Flexibility
Short-term investments are flexible meaning that investors can liquidate their investments easily before they fully pan out.
Short-term investments are also beginner-friendly and if you are just getting started as an investor a short-term investment is the way to go.
Disadvantages of Short-term Investments
High-Risk
Short-term investments tend to be high-risk/high-reward – in other words, while you stand a chance to make a huge return with a short-term investment vehicle such as crypto or stocks, there’s also a chance you could lose a decent chunk of your money.
Maintenance Costs
Another disadvantage of short-term investments is that it comes with high costs due to inflation, market fluctuations, and most importantly taxes. Tax treatments are often unfavorable to short-term investments as the tax rates on profits can be discouraging.
What is a Long-Term Investment?
A long-term investment is an asset that individuals hold for more than three years. Long-term investments are not usually affected by short-term changes in the market.
Long-term investors are in it for the long haul and investments can be held for up to 7-10 years. Examples of long term investments include real estate, growth stocks, target-date funds, small-cap stocks, and more.
Advantages Of Long-term Investments
An advantage of long term investments is that it is not time-consuming as it doesn’t require constant attention or monitoring markets for fluctuations on a daily basis.
In the long run, long-term investments are also more profitable in the sense that they are subject to less transactional fees, even capital gains tax is more favorable to long-term investment than short-term investments.
Disadvantages of Long-term Investments
Illiquid Nature
The single biggest disadvantage of a long-term investment is that the fact that they can not be easily converted to cash and the early liquidation of assets can mean a significant loss.
After considering the advantages and disadvantages of short-term and long-term investments you have an idea as to which works best but each individual has a unique financial situation that also influences financial decisions such as investments.
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