- Short-term vs. long-term investment strategy involves different mixes of assets.
- They both have the same goal in mind—grow your dough for a secure financial future.
- Understanding the difference between short-term and long-term investments is simple. Spoiler alert: You can do both.
The word “investing” can often conjure visions of super-intense people on the New York Stock Exchange screaming, “Buy!” or “Sell!”
You’ve probably watched someone ring the closing bell on Wall Street to signal the end of the trading day. You might wonder if you’re savvy enough to make the right investments and if investing is right for you. It probably is, and here’s why:
Only 11% of U.S. workers in the private sector can expect a defined benefit pension (the kind a company gives out). The rest of us need to save for our own golden years—and it’s not enough to stash your cash in a savings account. The typical bank interest rate is way too low to keep up with inflation.
Not that investing is only about retirement. It’s important to understand the difference between short-term vs. long-term investments—and to know that you can do both.
For example, maybe you turned that $250 holiday check (thanks, Grandma!) into some kind of bond. Yet you’re also playing the long game by maxing out your 401(k) to take advantage of the employer match. (Smart.)
What’s the difference between short-term and long-term investments?
The difference between short-term and long-term investments is pretty simple: Time.
A short-term investment is generally one that you plan to use within five years or fewer, while a long-term investment pays off ten years or more down the road. (There’s also intermediate-term investment—more on that later.)
The number of years you plan to invest is known as a “time horizon.”
If you plan to retire in 15 years, that’s your time horizon. This number helps determine your investment choices. Your risk tolerance is also important.
Repeat after me: Investments aren’t guaranteed.
However, not all investments have the same degree of risk.
Speaking of risk, short-term vs. long-term investment strategies share an essential principle: Very rarely should you rely on just one kind of security or asset class.
Having a mix of different assets, aka a “diversified portfolio,” is crucial: If one asset tanks, you’ve got other eggs in other baskets.
An automated investment app like Twine can help you build a diversified portfolio based on your time horizon and risk tolerance.
For example, Twine has “glidepaths” that consider your time horizon and gradually de-risk your portfolio as you get closer to your goal.
What is Short-Term Investing?
Your goals will have different time horizons and should have different strategies.
Suppose you hope to start a business three years from now. Short-term investing can be one way to goose your existing capital and give you more money to play with three years down the road.
But at the same time you should also keep contributing to retirement.
If you’re a naturally cautious investor, you might pick a conservative short-term portfolio of mostly bond exchange-traded funds (ETFs), with stock ETFs making up a very small portion (no more than 6%) of the total amount. A moderate risk short-term portfolio could have 90% bond ETFs, with the rest in stock ETFs.
And if you’re someone who isn’t afraid of some loss when investing for a short-term goal, an aggressive short-term investment approach might be 60% bond ETFs and 40% stock ETFs.
(If you’re using an automated investment app like Twine, your portfolio could be adjusted for optimum risk reduction as you get closer to your goal.)
What is Long-Term Investing?
Your financial life isn’t just about quick returns, though.
A long-term investment goal (like retirement) means you have more time to grow your dough. It also means you can assume more risk because you have those additional years to recover from any downturns.
Did hearing the D-word give you the chills? Relax.
While no one can predict market downturns, conservative investors could do just fine with a long-term portfolio of anywhere from 55% to 70% stock ETFs and the rest in a less volatile investment like bond ETFs.
The portfolio of a moderate risk-taker could look similar, at least for a while: The same 55% to 70% in stock ETFs—with the higher stock ETF percentages in the years further away from the goal—and the rest in bond ETFs. (Again, an app like Twine will take care of the time adjustments for you.)
For the go-big-or-go-home investor, an aggressive long-term portfolio might consist of up to 90% stock ETFs, with the rest in bond ETFs. It helps if you have a high household income and/or extensive experience with investing.
Incidentally, there’s a third path to consider: the intermediate-term goal, 5-10 years. You could take on a little more risk with an intermediate-term goal than with a short-term investment goal.
For example, you might invest more in equities or in a riskier fixed income asset (such as high-yield or emerging market debt).
However, it’s likely better to ask an expert for help with this kind of allocation; a beginner might not be able to figure out how much to put into those riskier assets.
To sum up: Short-term vs. long-term investment isn’t an either/or situation. A savvy financial plan can easily contain both.