Guy Gentile: The Difference Between Short-Term and Long-Term Investing

When it comes to investing, 66 percent of 18-29 year olds (and 65 percent of 30-39 year olds) view investing in the stock market as “scary” or “intimidating.” Understanding different types of investments and how to best utilize them can help you get a better idea of what to expect when it comes to investing both long term and short term and ease the associated fear.

Long-term and short-term investments are distinguished by how you use them. The same stock could be a short-term investment for one person and long-term investment for someone else, simply depending on how long they are held before being sold. During different times in your life, your investment needs may change. Knowing the basics behind each type of investment, as well as the risk involved help determine the best type of stock for you.

Short-term investments often include stocks, options and EFTs, whereas long-term investments are usually those such as real estate, mutual funds and bonds.

Short-Term Investments

Short-term investments are defined as any asset you hold for one year or less. Most investors often hold short-term investments for no more than a few weeks or months at a time. These investments are often preferred if you know you need a certain amount of money at a certain time and are looking to profit off volatility and near-term gains. Since these investments are held for such a short period of time, these traders often need to be much more active than those solely involved with long-term investments.

While these investments can differ, they often share some basic features. Short-term investments are often volatile assets, which allow the price to move quickly enough for investors to profit off the asset within a brief period of time. These investments also usually have relatively small price movements, so traders try to make up for smaller gains by making more frequent trades. The final feature they share is that short-term investments are almost always highly liquid, allowing investors to quickly sell the asset to make a profit. Due to short-term stock liquidity, we often see short-term investments in stocks, options and EFTs.

Traders have less time for short-term investments to regain any value they lose, so they often tend to look for safer products that will post gains in the immediate features. The exception to this are day traders, as they tend to look for high volatility swings, capitalizing on sudden price movements in an asset over a course of just hours.

Long-Term Investments

Long-term investments are held for more than one year and include real estate, mutual funds and bonds.  Most investors hold long-term investments for several years as a part of an overall strategy for their portfolio. They can be more aggressive than short-term investments because they can afford losses, as the investment will usually gain back the value over a period of time. Long-term investments are often more passive because they do not involve actively buying and selling.

These investments also vary but share some basic features. Long-term investments gain value slowly but predictably, which makes them better to hold for a while. They are often also illiquid assets and can not be sold as quickly as many short-term investments.

The biggest risk for long-term investments is volatility, as the fluctuations in financial markets can cause investments to lose value over time.

Tips for Investing

Changing your spending habits. Among non-investors, 53 percent say they don’t have money to invest. Before you start investing, you need to have discretionary money. Oftentimes, people have this money but are using it in other ways, from multiple streaming subscriptions to going out to eat. The average American household reportedly spends $3,000 a year dining out. Discretionary spending can be allocated toward investments.

Start investing as early as possible. During different stages, you will want to have a different mix of short and long-term investments. When you are younger, you may want to focus more on long-term investments that could help build resources for retirement later in life. Additionally, For example, short-term investments could help provide funds for immediate income or a down payment on a house. Later in life, when you’re reaching retirement, short-term investments may be a more ideal source of passive income.

Invest in what you understand. Do your research. Read company profiles thoroughly before investing. If you do not have a thorough understanding of the industry and what you are investing in, you can miss the mark and potentially lose money.

Diversify as much as you can. Having a mixture of long-term and short-term investments, in different industries can help provide stability for your portfolio. This includes across asset classes as well as within asset classes. Also, add a 401(k) to the mix. According to the U.S. Bureau of Labor Statistics, three in ten workers with access to an employer match 401(k) fail to participate in the program. If an employer is matching what you contribute and you are failing to contribute, you are essentially throwing away free money.

Whether you choose to start growing your financial portfolio through short-term or long-term investments, it is important to take these steps as soon as possible. By having a basic understanding of short-term and long-term investments, the risks they have and understanding the basics of investing, you can set yourself up for success and maximize your finances.

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