The ultimate purpose of short and long term investments is the same - to grow one’s wealth. Yet, it is always tough to take a call on whether one should opt for the short or the long term investment.
A short-term investment can be risky if one hasn’t done proper due diligence about the investment options they want to opt for. However, a good strategy, sharp focus on share-related developments and quick reactions to them can help one have good gains through the short-term strategy.
On the other hand, long-term investments seem less risky as they go by strong investment market fundamentals and overcome downtrends sooner or later. What we can’t ignore is long-term investment options like stocks and real estate are also not 100% foolproof.
Investors can lose their money if the company falls prey to stiff competition, poor management, ownership disputes or a big fraud. It forces one to think which is a better option - short- or long-term investment. Both have their pros and cons. Here, we will discuss why they can be chosen.
Reasons for choosing a long-term investment
Works as an inflation-proof option
Long-term investments can help you a great deal in providing cover against inflation, if not beating it completely. An investor must earn a good return on their investment since they pay tax on their earnings and inflation can make their gains look small.
Long-term investment options like stocks and real estate may not be completely safe, but in the long term, they are likely to provide you a higher rate of return and can boost your purchasing power considerably.
Investments like bonds also help you earn good interest in the long run. They don’t secure your retirement completely but they keep your money safe for old age or rainy days.
Can be a good decade-long output plan
A typical timeline for low- to medium-level risk portfolios can be of five to seven years. However, once you move to the 10-year timeline, you can look for riskier investments like dividend stocks. You can park your money you don’t need for the next decade in assets like dividend stocks. These stocks will pay you regular dividends and also provide good growth potential. These investment options will ensure that you get regular payments from your investment.
Can secure your retirement as a young person
If you have many years to work in the future, a long-term investment like stocks can keep your investment portfolio in good health. It is highly recommended that you go for a diversified portfolio so that you don’t lose all your money in case of recession. If you are young, 20 years away from retirement, and lose money in stocks, you will have sufficient time to recover and add variety to your portfolio.
These factors make the long-term investment look lucrative. But short-term investment options have their own pros. Here, we will discuss a few of them.
Reasons for choosing short-term investment options
Provides money when you need it soon
Sometimes, you need to meet your financial targets in the short term to provide you a stable income source. It may not build your portfolio in the long term, but you may use that money for a monthly instalment or a down payment for a home. In such a scenario, short-term investment options like cash, bond, annuities, mutual funds, short-term bonds and certificates of deposit may come handy. In some deposit accounts, the account holder gets a modest but set rate of return, which ensures that they get some money every month. Likewise, mutual funds and short-term bonds provide you certain income without the fear of losing your invested money.
Provides one a regular source of income
A short-term investment can be a regular source of income provided one selects the right choices in the beginning. One can prefer highly rated bonds and similar assets rather than their riskier counterparts. Such options may not give you a high income, but they are likely to give you a regular income. Annuities are a good example of short-term investment. While it may provide you only modest gains, it will give you a regular income with tax benefits for a lifetime.
Works as a safe option for beginners
Those who are trying their hands for the first time in the investment market can opt for short-term investment options. However, they should do proper research before entering the market. Plus, their investment amount should not be high as they also risk losing all their money. Early gains, though meagre, will give beginners a confidence boost, and they can, later on, switch to long-term investment options.
Investors use short- as well as long-term investment tactics. There is no set format to get good returns. We may follow some good points from one’s successful strategy, but we should delve deep into investment tactics before following the short- or long-term investment strategy.
Louise Davies and Fortuna Wealth Management Pty Ltd ABN 19 608 602 277 are Authorised Representatives of Synchron AFS Licence No 243313 for Financial Planning Services Only.
The information contained herein is of a general nature only and does not constitute personal advice. You should not act on any recommendation without considering your personal needs, circumstances, and objectives. We recommend you obtain professional financial advice specific to your circumstances.