Long Term Vs Short Term Investment

While diversification can help build a strong investment portfolio, you should also keep your financial goals in mind. If you’re looking for quick returns, you may want to consider a short-term investment strategy. And if your sights are set on the future, long-term investments may be favorable. 

Generally, you hold a long-term investment for longer than 1 year, while a short-term investment’s time horizon tends to be 1 year or less. Before you decide how you’ll invest, let’s explore the different implications of short-term versus long-term investments, some examples of each and their respective potential advantages and drawbacks.

What Are Long-Term Investments?

Long-term investments are typically investments you hold for longer than 1 fiscal year. If your goal is to see returns over an extended time, you may want to consider long-term investments. College funds and retirement accounts, like IRAs and 401(k)s, often house these types of investments.

Long-Term Investment Examples

Investments from various asset classes can be long term or short term. However, people may keep these assets in their portfolio for more time to reach their long-term goals:

• Stocks
• Bonds
• Mutual funds or index funds
• Exchange-traded funds (ETFs)
• Real estate

What Are Short-Term Investments?

A short-term investment is held for 1 year or less. You could buy and sell these investments within months, weeks or even days. If you want to yield faster returns, short-term investments could be worth exploring.

Short-Term Investment Examples

Some investments people commonly used for quicker gains include:

• Short-term bonds
• Certificates of deposit (CDs)
• High-yield savings accounts (HYSAs)
• Money market accounts

You can hold some of these assets for longer than a year. However, these investment options can still yield profits in less than a year.

What’s The Difference Between Short-Term And Long-Term Investments?

Aside from the length of time you hold onto each, short-term and long-term investments have some other differences.

Short-Term Vs. Long-Term Investment Pros And Cons

Just like any investment, short-term and long-term investments come with potential risks and rewards. 

Short-Term Investment Pros And Cons

Here are a few common benefits and downsides of short-term investments.

Long-Term Investment Pros And Cons

Look out for the following advantages and disadvantages of long-term investments.

FAQs: Short-Term Vs. Long-Term Investments 

Here are a few common questions people ask as they learn about short-term and long-term investments.

Should I invest long term or short term?

Ultimately, the best type of investment depends on your investment goals. If it makes sense for your situation, try to invest in a mix of short- and long-term assets. A diverse portfolio can help level out your overall risk tolerance. 

Consider factors like how much time you have to gain returns. For example, someone who starts saving for retirement early may yield more benefits from long-term investments than someone 2 years from retirement. 

Are stocks long-term or short-term investments?

Stocks are generally a long-term investment. And investing in stocks for the long term often yields higher returns. If you use stocks as a short-term investment, your money grows in the stock market for less time. Also, any short-term returns are taxable as income, so you may pay more taxes on those returns.

What is a good short-term investment?

A good short-term investment will offer liquidity, stability and quick returns. HYSAs and money market accounts often have higher interest rates than typical savings accounts. You may not have to keep your funds in the account for a certain time to earn that interest. CDs can also offer high returns in a short period, but you usually can’t access funds until the end of the CD’s fixed term.

HYSAs, market money accounts and CDs are also low risk investments. The FDIC insures funds up to $250,000 in all these types of accounts.

The Bottom Line

Long-term and short-term investments each come with their own set of considerations. Short-term investments can see fast returns, but long-term investments have more time to grow. The right type of investment depends on your situation. If you’re a stock-market beginner or need guidance, you can reach out to a financial advisor for investment advice.

As you build your investment portfolio, you can use the Rocket Money^SM app to track all your different investments in one place. Download the app today to start keeping tabs on your financial growth and more.