Short-term VS Long-term investing

Globally, investing is divided into two types: short-term and long-term. The first involves a quick return over a short period of time, while the second is a longer-term process that aims to create a secure future. 

 

In this article, we look at the two main types of investing and their pros and cons. 

Short-term investing: all you need to know

Short-term investing is investing in assets or projects for a short period of time, typically up to one year. The main feature of short-term investments is the high liquidity of assets. That is, the investor invests in assets that can be sold at any time. Therefore, the main goal of short-term investing is to earn a quick return. By choosing this strategy, an investor sacrifices high future returns for liquidity and profitability now. 

 

In addition to private investors, short-term investing also attracts large corporations, which use this strategy to generate additional income and further develop their businesses. 

 

In 2018, global corporation Microsoft invested $135 billion in short-term financial instruments. In addition, Apple also invested $254bn in short-term investments. The corporations decided government, corporate bonds and bank deposits as assets.

 

There are two ways to make money from short-term investments:

 

1. Buy assets cheaper — sell them higher. An investor can invest in any asset and the greater the difference when buying and selling, the more profit he will make. This strategy can bring a large amount of profit to an investor, but is risky because the more liquid and expensive an asset is, the riskier it is. In addition, in order for a trade to be successful, the investor needs to monitor the market regularly, the situation and study a lot. 

 

2. Receive current income from the investment. This method includes receiving dividends on shares or bonds in which the investor has invested money. 

 

Financial Instruments for Short-Term Investments

1. Stocks. Most investors prefer to invest in this asset in the short term because the price of shares of famous companies that are going public can change very rapidly. In addition, buying stocks allows you to receive dividends, creating passive income.

 

2. Bonds. An instrument with low volatility and offers investors a stable way to earn income. You don't have to buy 10-year bonds. You can purchase bonds for one year, during which you will receive interest, and at the end of the year you will receive the invested amount and a profit. 

 

3. Short-term bank deposits. Deposits with a term not exceeding six months are considered short-term deposits. As a rule, they offer a return of 5 to 6% per annum. Of course, you will not be able to multiply your capital by times, but it is quite possible to get the sum you need. 

 

4. Exchange-traded funds (ETFs). They have high liquidity which makes them an excellent instrument for short-term investments. The composition of an index fund's investment portfolio usually follows the composition of a particular index. That is, if an investor buys an ETF security, he becomes a shareholder in all companies whose shares are part of the fund's portfolio. The average yield on short-term investments in ETFs is 20-30%. 

 

Pros and cons of short-term investing

The main advantage of short-term investments is their high liquidity and the ability to generate income quickly. In addition, another advantage of short-term investing is the low entry threshold. Investors can buy assets with any available amount in their capital and make income even from insignificant funds. 

 

The downsides include the risks associated with highly liquid assets as well as the large amount of time that must be spent studying the market, the properties of the asset and constantly monitoring the situation to choose the best time to buy or sell. 

Investing for the long term: all you need to know

Long-term investing is a strategy which involves investing money for a period of 3 to 5 years or more. It is suitable for investors who do not want to engage in speculative trading and do not want to go into details of how financial markets work and prefer to act according to the "buy and hold" method. 

 

If an investor decides long term investing strategy, he does not have to follow the news constantly, and he is not afraid of economic setbacks, because in the long term the market is always increasing and even after major falls the economy recovers and can make new historical highs.

 

Although returns on long-term investments have to wait, they have higher returns than short-term investments. For example, in 1997, Amazon shares were trading at $2 per asset. The company's share price has risen in recent years and now stands at $118.21. If you had bought 500 shares of Amazon in 1997, the return would now be almost $60,000. 

 

The basic financial instruments of long-term investing are no different from those of short-term investing. They can also be stocks, bonds, bank deposits or index funds. The only difference is the timing of the investment and the holding period of the assets. 

 

Rules for long-term investments

The basic rules of long-term investing should be borne in mind to make sure you invest for the long term and not for the long term. 

 

1. Invest in shares of reliable companies 

 

Long-term investments should be made with the help of long-established companies or organizations with an excellent reputation. The risk of bankruptcy of such companies is minimal and their revenues and profits are regular. 

 

2. Do not wait for the share price to fall in order to buy it

 

Long-term investors invest on a regular basis without waiting for the price to fall, because after buying a stock at a low price, it may fall even lower and the investor will lose money. 

 

3. Diversify your investment portfolio

 

Invest in different types of assets, such as stocks and bonds. Stocks will be responsible for high returns, and bonds will lock in profits and give a sense of stability. Also, don't invest all your money in stocks of one company, choose a few promising institutions with a good reputation and high returns.

 

Diversification will help protect against crises in certain sectors. For example, during the COVID-19 pandemic, shares of oil corporations and airlines plummeted, but assets of IT companies showed significant growth. 

 

4. Don't worry about bad news

 

When choosing long-term investing, you should be comfortable with all changes in the market and follow your strategy. Even if the assets you buy fall in value, don't panic, they will eventually recover. 

 

Pros and cons of long-term investing

Advantages of investing long term include time savings, because you don't need to constantly monitor the market, higher profitability and stability of earnings, as well as lack of psychological distress due to economic crises.  

 

The disadvantages are that it takes a long time to recoup your investment and if you are not an experienced investor, you can invest in securities of unreliable companies. 

Which type of investment should I select?

The answer to this question comes from your investment objectives. If, for example, your goal is to secure your retirement or earn a large sum of money to solve a global problem, then long-term investments will do. 

 

If you want to cover a short-term need, such as buying a car or new machinery, or making repairs, then short-term investments will suit you. 

 

Experienced investors also advise combining the two strategies and using long-term investments to accumulate more global amounts and short-term investments to meet needs in the near future.