Long-term investments enable you to take advantage of compound interest, while providing tax advantages through accounts such as 401(k), IRA or Roth IRAs.
Short-term investments provide an option for people who need to meet financial goals within a shorter timeframe, such as making down payments on homes. Such investments include deposit accounts that offer fixed rates of return.
Long-Term Investing
Long-term investing can be useful when trying to achieve goals that may take several decades, like retirement savings and college fund. When selecting long-term investments, be sure to factor in their potential return on investment (ROI), liquidity needs and risk appetite as part of the equation.
Investors planning on keeping their investments for an extended period, such as years or even decades, typically opt to take on greater market risk. This is because having more time on their side increases your chance of weathering short-term market fluctuations and volatility more easily.
Alternatively, if your goal lies just a few years ahead – such as buying a car or taking a family vacation – lower market risk options and greater liquidity may be more suitable. These might include certificates of deposit, high yield savings accounts or bonds. Dollar cost averaging can also help ensure you’re not forced into selling investments when it’s not convenient.
Short-Term Investing
Many financial goals take place over a span of months to years, from purchasing a car or home to saving for retirement. A combination of long and short-term investments may be ideal in meeting these objectives; additionally, consulting a professional advisor may prove invaluable in meeting them successfully.
Long-term investors looking for maximum returns could find greater success investing in stocks; however, these returns cannot be guaranteed and may fluctuate with market fluctuations or economic downturns.
Investors with short time horizons, such as those saving for a wedding or down payment on a home, should opt for low-risk investments like cash and bonds offering fixed rates of return. These tend to be less volatile while also featuring reduced fees so more of your investment remains in your account.
Taxes
Long-term investing tends to result in lower taxes. Short-term investors who frequently buy and sell assets are subject to higher tax rates that eat into profits and potential returns, whereas those taking an approach of long-term investments benefit from compound interest, where each return reinvested and added back onto the overall investment can grow compound interest faster.
Both strategies offer their own set of benefits, with many investors employing multiple approaches in their wealth-building plans. It’s essential that investors carefully consider their timeline and goals when selecting an investing strategy; otherwise it might make sense to reach out for advice via the free AdvisorMatch service on SmartAsset, which connects qualified financial advisors directly. You could also explore our ranking system of top online brokers and robo-advisors using this same rating criteria; including fees/minimums/investment choices/support capabilities/mobile app capabilities etc.
Risk
Longer-term investments like stocks and mutual funds tend to offer higher potential returns than short-term options like certificates of deposit (CDs). But these higher returns often come with greater market risk.
Long-term investing strategies offer investors who are decades away from retirement an effective means of growing their money while taking calculated risks over time. Furthermore, these long-term strategies leverage compound interest’s power of increasing returns with time.
Short-term investors with immediate savings goals may benefit from short-term investments like online savings accounts or money market mutual funds that offer low risk, competitive returns and easy accessibility when needed. SmartAsset’s free advisor matching service can assist with finding suitable short- or long-term strategies tailored specifically for you and your goals1. 1