Life Money

The differences between short term and long term investments

November 2, 2016

Personal finance is an ongoing issue for everyone. We want to establish mechanisms to ensure a secure foundation in our future. This matters whether it’s for retirement or merely ongoing stability in a volatile market. But with investments, there will be hard choices as to what we choose to invest in.

It’s here that we can consider the differences between long term and short term investments with high returns. Naturally we all want both both. It’s therefore important to consider what the various qualities of each are.

Investments

First, we should consider what investments are. As Maps of the World summarises:

“Investment is the commitment of money or capital to purchase financial instruments or other assets in order to gain profitable returns in the form of interest, income, or appreciation of the value of the instrument. Investment is related to saving or deferring consumption.”

Investment vehicles include stock, real estate, mutual funds and so on. These are then demarcated into short and long-term investment vehicles.

Short term investments

Short term investment vehicles are not acquired with much expectation by way of return. We purchase these primarily for security, since there is less chance of loss. Short-term investment returns might be used to help purchase a car or home, since these are immediate concerns.

Savings accounts and certificates of deposit are two of the most common examples of short term investment.

In summary, short term investments are about security, certainty and immediacy.

Long term investment

Building our future for retirement is a long term financial goal. These start being built usually when people are in their twenties or thirties, aiming for their post-work life. We can also invest in companies, which usually build over an extended period of time as the businesses improve.

If successful, these long-term investments yield greater returns than shorter investments – since long-term have been allowed time to mature and yield more. Of course, a longer time spent in riskier domains means there’s a higher chance of losing everything.

The point is both categories serve different ends. We wouldn’t use short-term investments to secure our retirement for example. However, that doesn’t mean we can’t mix and match different returns for similar purposes. We need only be aware of their risks and what they are designed to achieve.

(Picture credit: Peggy Marco / Pixabay)

 

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