Long-Term Investments vs. Short Term

Figuring out what to invest in isn’t always intuitive. Should you buy stocks? Bonds? Maybe crypto? Instead of trying to pick between these different types of investments, consider reorienting your thinking to decide between long- and short-term investments. 

This decision should be based on your time horizon — that is, the time before you need to cash out an investment. Determining your time horizon plays an important role in your investment strategy and the decision on whether to pick a short- versus long-term investment. 

Take a look at the key differences between long-term and short-term investments, their potential rewards and associated risks

What are Long-Term Investments?

There’s no hard-and-set rule, but in general, a long-term investment is one that investors intend to hold for multiple years or even decades. Think somewhere in the range of five years or longer. 

The goal of a long-term investment is to profit from compounding over time, both from increases in the price of the investment and reinvested dividends or interest income. 

Many assets can be used as a long-term investments, but the most common ones include stocks, bonds with longer maturities, real estate, mutual funds and exchange-traded funds (ETFs). 

Pros:

• Higher returns: All else being equal, investments that are held long term generally earn higher returns than those held short term thanks to the power of compounding. 
• Tax efficiency: Investments held for more than one year can qualify for the more advantageous long-term capital gains tax rate. 
• Lower transaction costs: With long-term investments, you’re typically making fewer buy and sell transactions than with short-term ones. This can reduce overall transaction costs like brokerage fees, which over time can have a significant impact on your net returns.

Cons:

• Reduced liquidity: Investors who suddenly need to cash out long-term investments may be unable to do so at an advantageous price because of volatility or unrealized losses. 
• Market volatility: Over a long period, your investments may incur unrealized losses and large fluctuations resulting from bear markets and crashes. While long-term investing often means weathering these storms, it can still be upsetting to deal with. 
• Potential for missed opportunities: When investing for the long term, you might miss out on short-term opportunities that could potentially yield quick gains, such as momentum in a particular stock market sector or a surging cryptocurrency. 

What are Short-Term Investments

Short-term investments are those intended to be held for a few years at most. Again, there is no hard-and-fast rule, but in general, a short-term investment can range from a few months to up to four years.

Investors often make short-term investments to keep money safe and grow modestly for an anticipated near-term purchase or for emergency access. Examples include a future downpayment on a house or a six-month emergency fund. 

Examples of common short-term investments include money market funds, U.S. Treasury bills, certificates of deposit (CDs) and short-term bond funds. 

Pros:

• Good liquidity: With the exception of CDs that have a lock-up period, most short-term investments are highly liquid and can be converted to cash easily. 
• Safety of principal: Although not risk-free, most short-term investments aim to minimize or eliminate volatility, making them a safer option for preserving your capital. 
• Income potential: Short-term investments often pay out monthly interest, which often increases when interest rates rise. 

Cons:

• Limited growth: All else being equal, short-term investments will generally underperform long-term investments because of their lower risk and time horizon. For example, the historical returns on stocks and real estate have beaten Treasury bills. 
• Inflation risk: During periods of high inflation, there is a risk that the returns on short-term investments may not be able to outpace it. 
• Tax implications: Depending on the type of short-term investment, the tax consequences may be less favorable compared to long-term investment, as they could be taxed as ordinary income or short-term capital gains. 

Comparing Long-Term Investments vs. Short Term

While both long-term and short-term investments have their unique advantages and disadvantages, understanding how they stack up against each other is critical in shaping your investment strategy. Take a deeper look at the comparison to help you make informed decisions that align with your financial goals and risk tolerance.

1. Risk Tolerance

A fundamental difference between long-term and short-term investments is the level of risk involved. Long-term investments like stocks often involve higher risk as they aim to ride out market volatility over extended periods, whereas short-term investments like Treasury bills are less exposed to immediate market fluctuations and pose a lower risk. 

2. Return Potential

In exchange for the higher risk, the expected returns on long-term investments like stocks tend to be much higher. In comparison, the lack of risk in a short-term investment often leads to commensurately lower expected returns. 

3. Investment Goals

Long-term investments are typically aligned with objectives like retirement savings or funding a child’s college education. Short-term investments, on the other hand, are often geared toward achieving more immediate financial goals, such as saving for a down payment, an emergency fund or a car purchase. 

Go Long or Short with Benzinga’s Best Investment Brokers

Whether you’re in the market for a short-term or long-term investment, you’ll need a broker. With so many out there competing for your hard-earned money, it can be difficult to figure out which is the best. Benzinga has a curated ranking of the best investment brokers. Check out the insights below to find the right broker and kick-start your investment journey.

Understanding Investment Types: Long Term vs. Short Term 

The choice between long-term and short-term investments depends largely on your financial goals, risk tolerance and time horizon.

While long-term investments offer the potential for higher expected returns over time and better tax efficiency, they also tie up your capital and can be hurt by market volatility.

On the other hand, short-term investments offer lower risk and greater flexibility, but they come with lower expected returns and potentially less favorable tax treatment.

A well-rounded investment strategy often involves a mix of both short-term and long-term investments. It’s about understanding your financial objectives, risk appetite and the time you can commit to your investment journey. 

Frequently Asked Questions