Setting up an investment portfolio requires clarity about what your goals are, what your risk tolerance is and what kind of investments you want. You also need to know what your time horizon is. Are you looking to make money quickly or are you in it for the long haul? This will impact whether your portfolio is focused on short-term investments, long-term investments or some mix of the two. Knowing the difference between short- and long-term investments and the pros and cons of each will help you make sure your investment portfolio is suited for exactly what you want to achieve.
For help setting up a portfolio and finding the right mix of investments, consider finding a financial advisor using SmartAsset’s free financial advisor matching service.
Long-Term Investments vs. Short-Term Investments: The Basics
Generally speaking, short-term investments are ones held for less than a year, while long-term investments are held for more than a year. Both short- and long-term investments could be in any asset class, but some assets are more likely to make sense as one or the other.
Stocks, for instance, could fit in either asset class. If an investor believes a stock is going to get a brief bump in value, they could buy shares and sell it when they believe the stock as reached its peak. One example of such a short-term investment would be someone who bought shares of Gamestop at the beginning of the Reddit-fueled movement to prop up the value of the stock in 2021 to hurt institutional investors who had shorted it. If an investor sold it once the value had gone up, they would have made money by holding the stock for a very short time.
On the other hand, if an investor finds a stock they believe will grow slowly over a long period and holds it for at least a year, selling, for instance, closer to retirement age, that is a long-term investment.
Bonds are generally long-term investments, though there are short-term bond funds in operation.
Short-Term Investment Pros and Cons
Short-term investments can be useful in a portfolio, but they do carry a heavy risk. The major benefit of a short-term strategy is that if it is handled correctly, it can bring in serious returns quickly. This money can be reinvested and continue to grow, boosting the total value of your portfolio.That said, a short-term investment carries a substantial risk. If the stock you think is going to skyrocket craters instead – or if you mistime the market and miss the ideal time to sell – you’ll be left carrying the water.
Another con of short-term investments is that even if you do make money, the taxes are higher. Short-term capital gains are taxed as regular income, while long-term capital gains have their own separate tax rate. If you make a lot of money off of short-term investments, you may be bumping yourself into a new tax bracket, potentially eating into your earnings.
Long-Term Investment Pros and Cons
The biggest pro of long-term investing is that there is a lot less risk with than with short-term investments. If you’re planning on holding an investment for 20 years, it doesn’t really matter if there is a recession in year seven – as long as the overarching economic system holds up, history shows that you will be up in the long run.
The other major pro is that you’ll pay less in taxes when you do cash out. Long-term capital gains are taxed at between 0% and 20%, so the government will take less of the money you earn than if you’d made money more quickly.
The con of long-term investing is that with lower risk generally comes lower reward. Your earnings could be degraded by inflation over the period you held it, and the chances for a huge gain are much smaller than in a market-timed investment.
Long-Term Investments vs. Short-Term Investments: Which Is Right for You?
For most people, long-term investments are the most sensible choice. Short-term investments require a lot of attention, and most people aren’t willing to do that. A financial advisor may recommend some short-term investments, but unless you are willing to put a significant chunk of your money at risk, it might not be worth it.If you do use short-term investments, make sure you do all of the research necessary and, ideally, work with a financial advisor who can guide you.
Also, make sure you also have long-term investments in your account to form the base of your portfolio. Short-term plays can be used to look for a boost, but for most individual investors long-term investments are the heart of a solid strategy.
The Bottom Line
Short-term investments are held for less than a year, while long-term investments are held for a year or longer. Generally speaking, long-term investments are the best option for most individual investors, while short-term investments can be used if you are savvy enough to exploit openings.
Investing Tips
- For help building a portfolio of various investment types, consider working with a financial advisor. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Want to see how much your long-term investment will be worth over time? Use SmartAsset’s free calculator to get a sense of the return you could be looking at.
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Short-Term Investments vs. Long-Term Investments: The Basics
Short-term investments are typically held for less than a year, while long-term investments are held for more than a year. The distinction between the two lies in the time horizon and investment strategy.
Short-Term Investments
Short-term investments are often focused on making quick profits within a short period. They can involve various asset classes, such as stocks or bonds. One example of a short-term investment is buying shares of a stock that is expected to experience a brief increase in value and selling it when it reaches its peak. However, short-term investments come with higher risks. If the investment doesn't perform as expected or if the market timing is mistimed, there is a possibility of losses. Additionally, short-term capital gains are taxed as regular income, which may result in higher taxes.
Long-Term Investments
Long-term investments are held for an extended period, typically more than a year. They are often associated with a buy-and-hold strategy, where investors aim to benefit from the growth of an investment over time. Long-term investments tend to have lower risks compared to short-term investments. They provide the opportunity to ride out market fluctuations and benefit from the overall growth of the economy. Moreover, long-term capital gains are taxed at a lower rate than short-term capital gains, which can be advantageous for investors.
Choosing the Right Investment Strategy
For most individual investors, long-term investments are generally the most suitable choice. They offer stability, lower risks, and potential tax advantages. Short-term investments require active monitoring and may not be suitable for everyone. However, some investors with a higher risk tolerance and the willingness to actively manage their investments may consider incorporating short-term investments into their portfolio. It is important to conduct thorough research and, ideally, work with a financial advisor who can provide guidance based on your specific financial goals and risk tolerance.
Conclusion
Understanding the difference between short-term and long-term investments is crucial when setting up an investment portfolio. While short-term investments can offer quick returns, they come with higher risks and tax implications. On the other hand, long-term investments provide stability, potential tax advantages, and the opportunity for sustained growth. It is advisable to consider your financial goals, risk tolerance, and seek professional advice to determine the right mix of investments for your portfolio.
If you need further assistance in setting up your investment portfolio or finding the right mix of investments, you may consider working with a financial advisor. SmartAsset's free financial advisor matching service can help you find a qualified advisor in your area.
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