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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As someone deeply immersed in the world of finance and investment, I bring a wealth of expertise to the table. My extensive knowledge stems from practical experience, continuous learning, and a keen understanding of the nuances within the investment landscape. I've successfully navigated various market conditions, analyzed trends, and crafted strategies that align with both short-term gains and long-term financial objectives.
Now, let's delve into the concepts discussed in the article about setting up an investment portfolio:
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Goals and Risk Tolerance:
- The article emphasizes the importance of clarity about investment goals and risk tolerance. This is fundamental in determining the suitable mix of investments for an individual's portfolio. Achieving financial goals requires aligning investments with one's risk comfort level.
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Time Horizon:
- The time horizon is a critical factor in shaping an investment portfolio. The distinction between short-term and long-term investments is based on how long an investor intends to hold an asset. This decision is influenced by whether one is aiming for quick returns or pursuing a more extended growth strategy.
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Asset Classes:
- The article mentions that both short- and long-term investments can be in any asset class. Stocks are highlighted as an example that could fit into either category based on the investor's outlook – short-term for quick gains or long-term for gradual growth.
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Short-Term Investments:
- Pros include the potential for quick returns, but the cons highlight the high risk associated with short-term strategies. Short-term gains are taxed at regular income rates, and mistiming the market can lead to significant losses.
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Long-Term Investments:
- Long-term investing is presented as having less risk compared to short-term strategies. The potential for lower taxes on long-term capital gains is highlighted as a major advantage. However, the con is that the rewards might be lower compared to more risk-intensive short-term investments.
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Choosing Between Short-Term and Long-Term:
- The article suggests that, for most individuals, long-term investments are the more sensible choice due to lower risk and the requirement for less active management. It also stresses the importance of having a solid base of long-term investments in a portfolio.
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Role of Financial Advisors:
- The recommendation to consider working with a financial advisor is mentioned, especially when dealing with short-term investments. Advisors can guide investors in making informed decisions and mitigating risks.
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Tax Implications:
- Tax considerations are crucial, with short-term gains being taxed as regular income and long-term gains having a separate, often lower, tax rate. The article advises on the potential impact of taxes on overall earnings.
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Portfolio Composition:
- The article concludes by emphasizing that long-term investments are generally the core of a solid investment strategy. Short-term plays can be utilized for potential boosts, but they are not the primary focus for most individual investors.
In summary, the article provides a comprehensive overview of the key factors involved in setting up an investment portfolio, considering the interplay between short-term and long-term investment strategies.
