Investing is one of the most effective ways to grow one’s wealth. However, there are a myriad of factors to consider when choosing between short- and long-term investing. Both have their benefits and drawbacks, and deciding between the two strategies will depend on the investor’s personal financial goals, risk tolerance, tax considerations and more.
Short-term vs. long-term investing: which is right for you?
Generally, if an investor plans to access their money within three years, that investment is short term. Such investments help investors reach financial goals within a shorter period. These investors tend to prioritize steady income over portfolio building.
Ideally, the chosen investment method will protect the money’s value over such a short period. While prospective returns may merely minimize losses caused by inflation, short-term investments are still better than keeping the money at home or in a low-APR savings account.
Short-term investment examples include those that can easily be converted to cash. In other words, they are highly liquid. Such investments include U.S. Treasury Bills, traditional or high-yield savings accounts, money market accounts, short-term CDs, short-term bonds, and annuities.
There are also online investment platforms such as Yieldstreet, which offer short-term opportunities in alternatives such as private equity, venture capital, short-term notes, transportation, and more. Its curated and vetted opportunities are designed to create steady secondary income streams.
As with any type of investment, there are potential pluses and minuses.
Liquidity. Short-term investments permit quick and easy access to money.
Deposit accounts such as money market mutual funds or short-term bonds, for example, will allow investors to withdraw money as needed.
Flexibility. Compared to long-term investments, short-term investments may have more flexible withdrawal options.
Low Risk. Relative to long-term investments, there is generally less risk involved with short-term investments such as money market mutual funds and short-term bonds.
Low Returns. Prospective returns on a short-term investment could merely serve to guard against inflation. However, short-term investments are commonly associated with a stable income.
No Compound Interest. Short-term investments have less opportunities to earn accrued interest over several years.
Higher Taxes. There is no special tax rate on short-term capital gains. Short-term profits are generally taxed at the same rate as ordinary income.
Those who invest for the long-term generally do not plan to access their money for at least 10 years. Such investments can involve high-risk options since the money won’t be readily accessed, and thus can bounce back post losses.
Long-term investments may be the wisest choice for investors who will retire in more than 20 years and who seek protection from inflation.
Long-term investment examples include longer-maturity bonds and mutual funds, stocks, exchange-traded funds, 401(k)s, and real estate investment trusts.
Here are the primary upsides and downsides to long-term investing.
Compound Interest. Over the long term, compound interest can markedly boost returns.
Higher Returns. Money has more time to recover from losses and potentially take advantage of stock market growth.
Tax Benefits. While short-term capital gains are taxed as regular income, long-term gains are subject to graduated taxes, depending on income.
Illiquid. Investors may face obstacles to withdrawing money.
Less Flexibility. Options for penalty-free withdrawals are generally limited. For example, some retirement accounts require investors to be a certain age before funds can be withdrawn without penalty.
Higher Risk. Because money has more time to bounce back from losses, many investors pursue choices that carry some risk.
Primarily, short-term investments are more liquid, less volatile, easier to manage independently, and generally are more flexible. Overall, long-term investments are less liquid, more volatile, more likely to require active management, and are generally less flexible.
When a capital asset is sold for more than its original purchase price, a capital gain results.
What are Short-Term Capital Gains and How are They Taxed?
Short-term capital gains are taxed as regular income. In 2023, that rate can increase to 37%, depending upon one’s tax bracket.
What are Long-Term Capital Gains and How are They Taxed?
Derived from assets held for longer than a year, long-term capital gains are taxed at 0%, 15%, or 20%, with the average being 15% or lower.
Without a solid idea for where to place your capital, you could select investments that are either too risky, causing you to lose money, or too safe, leading you to miss out on growth.
Many experts agree that it is wise to fill your portfolio with both short- and long-term investments that align with your financial goals. A certificate of deposit could yield cash for a wedding in a year or two, for example, while brokerage account savings could help you buy a house in a decade or so.
Ultimately, the best investment strategy seeks to balance risk and returns. Consider both when deciding on an investment approach.
Day trading involves buying and selling securities the same day, with the goal of capitalizing on short-term price changes. With active investing, participants take more of a hands-on role in selecting stocks or other assets to buy and sell.
Day trading and active investing have the mutual goal of turning a profit in the stock market, and they both require the use of a brokerage to place and execute trades. However, they differ when it comes to timeframes, trade frequencies, risk, portfolio performance, stock types, and analysis style.
Long-term investors tend to use these tactics:
With passive investing, the goal is to build wealth gradually. The long-term investment strategy seeks to maximize returns by trading less. Rather than seek to beat the stock market, passive investors buy securities that reflect stock market indexes and hold onto them.
Examples of passive investing include index funds and holding investments in a retirement account for decades. The pros of passive investing include lower maintenance, steady returns, lower fees, lower risk, and lower capital gains taxes.
All investment approaches carry risk, however, and returns may not top the market. Increasingly, successful investing involves having a diversified portfolio, and passive investing is one way to achieve it.
Another way to diversify while generating passive income is through alternatives such as art, real estate, hedge funds, private equity, and venture capital. Alternatives are increasingly popular because they have low correlations to volatile public markets.
Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings.
Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk.
In some cases, this risk can be greater than that of traditional investments.
This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million. These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform. However, that meant the potentially attractive gains these investments presented were also limited to these groups.
To democratize these opportunities, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other alternative investments.
Understanding the advantages and disadvantages of short- and long-term investing is key to successful investing. In the name of diversification, many investors seek both kinds of holdings. Ultimately, investment decisions should hinge on one’s investment goals and risk tolerance.
All securities involve risk and may result in significant losses. Alternative investments involve specific risks that may be greater than those associated with traditional investments; are not suitable for all clients; and intended for experienced and sophisticated investors who meet specific suitability requirements and are willing to bear the high economic risks of the investment. Investments of this type may engage in speculative investment practices; carry additional risk of loss, including possibility of partial or total loss of invested capital, due to the nature and volatility of the underlying investments; and are generally considered to be illiquid due to restrictive repurchase procedures. These investments may also involve different regulatory and reporting requirements, complex tax structures, and delays in distributing important tax information.
Yieldstreet provides access to alternative investments previously reserved only for institutions and the ultra-wealthy. Our mission is to help millions of people generate $3 billion of income outside the traditional public markets by 2025. We are committed to making financial products more inclusive by creating a modern investment portfolio.