What Are Considered Short-term Investments?
Long-term investing is a tried-and-true strategy for building wealth. But that doesn’t mean it’s the only option for strengthening your financial security. Many people use long-term investments because they are generally less risky and allow your money more time to recover from market dips.
There are benefits and drawbacks to both short-term and long-term investing. Choosing which method to pursue, or employing a combination of them in your portfolio, comes down to selecting the specific vehicles in each category that will help you reach your goals.
Below, Vint explains how short-term investments differentiate from long-term investments and how to strategize for improving your financial standing.
Short-term Investment Definition
Typically, people use a short-term investment when they plan to access the capital within three years, though sometimes they wait as long as five years. The goal is to use an investment strategy that shields your money from declining in value throughout the short period.
Naturally, this means that your money is more secure but also that you likely won’t yield the high returns of a riskier investment method. Anything high in liquidity could be classified as a short-term investment.
That is, short-term investments are those that you can quickly cash in. Some of the most common examples include U.S. Treasury bills, high-yield savings accounts, certificates of deposit (CDs), money market accounts, and bonds with shorter maturity dates.
Some investors use short-term investments solely to minimize losses caused by inflation, particularly in low-interest environments. For instance, in early 2022, three-year CD interest rates stayed primarily under 1.5%. Though that seems like insignificant growth, it’s still preferable over keeping a cash jar or a savings account that pays 0.06% interest.
Examples of Short-term Investment
- Money market accounts
- Bond funds
- Municipal funds
- Roth IRAs
- P2P lending
Individual investors and corporations alike use various forms of short-term investments to improve their financial standing. Here are some of the most common strategies to consider:
Banks provide certificates of deposit, which lock up cash for a determined period. And generally pay out higher interest rates. The FDIC insures these deposits up to $250,000.
Money Market Accounts
These are also FDIC-insured accounts. While you must invest a minimum, money market accounts will yield higher returns than savings accounts. It’s essential to distinguish money market accounts from money market mutual funds because the latter are not insured by the FDIC.
Professional investment companies and asset managers provide bond funds, which typically come with fees. With that said, bond funds have above-average returns (relative to the risk) and an excellent short-term for shorter time periods.
Municipal bonds are issued by non-federal state and local government agencies. They usually allow exemption from income taxes and therefore yield tax benefits and higher returns.
Treasuries are an advantageous short strategy for many investors. They are government-issued bonds that come in many different forms, including bills, notes, Treasury Inflation-Protected Securities (TIPS), and floating-rate notes.
Individuals flock to Roth IRAs because they provide an array of investment options to go with lots of flexibility. You can withdraw Roth IRA contributions whenever you need without having to pay taxes or penalties.
Peer-to-peer (P2P) lending refers to lending platforms that conveniently match borrowers to lenders. This is an excellent method for using excess cash to boost your investments.
Long-term Investment Definition
When using a long-term investing strategy, your money has more time to recover after taking losses. Meaning there is more room for higher-risk choices. Most investors making this type of investment don’t plan to withdraw capital for at least ten years. One of the most common long-term investments is to put money toward a 401(k), IRA, or another retirement account. You can also use long-term investments through mutual funds, longer-maturity bonds, and stocks. Or, you can employ a group of investments (i.e. stocks and bonds) that are overseen by a fund manager.
Another such investment strategy is exchange-traded funds (ETFs), which you can trade more often than mutual funds. Many investors use real estate investment trusts (REITs) to invest money in promising real estate projects; REITs work much like stock in that you buy shares in the trust as you would shares in a company.
Long-term investing typically comes with lots of ups and downs. The best way to protect your investments is to keep contributing to your retirement or brokerage account, despite current market fluctuations. This strategy is known as “dollar-cost averaging,” and it allows you to purchase more stocks when prices are low and fewer stocks when prices are higher.
This method essentially means that you abandon your attempts to time the market and instead contribute and instead leave your money alone to play the long-term game. Most investors contribute to their accounts at least monthly while others contribute each paycheck.
Short-term vs. Long-term Investments
When investing in the short term, you will want to make less risky decisions because you will need to access your capital sooner. On the other hand, long-term investing gives your money more time to bounce back from dips in the market and provides you opportunities to capitalize on stock market growth. As such, riskier investment options make more sense when you are investing for the long term.
Distinguishing Factors Between Short and Long-term Investments
Short-term investments are typically more liquid, so you can have quick and easy access to your money. They are also less volatile, meaning your investments will likely remain stable in value over any given period. Depending on your strategy, you also may have more flexibility with withdrawals, and short-term investments are generally easier to manage yourself so that you don’t have to pay for professional financial services.
Contrastly, long-term investments are less liquid and usually make it more challenging to withdraw capital. And since they are more volatile, the value of these investments can drastically change depending on various factors such as economic conditions. Even if you are experienced, you will likely need to hire a financial professional to oversee your long-term investments — or at the very least, spend considerable time and energy managing them yourself.
Furthermore, many long-term investment options do not allow for penalty-free withdrawal. For instance, you must reach a specific age to withdraw funds from some retirement accounts, or you will have to pay a penalty.
Choosing Between the Two Strategies
Neither short-term nor long-term investments are inherently better strategies than the other. The ideal method is to include both types of investments in your portfolio, assuming they match your goals.
For example, if you have a honeymoon coming up in the next couple of years, it could be a good idea to put some funds in a CD or money market account. But if you are trying to build your emergency fund, you should use a traditional or high-yield savings account because you will need the option to easily withdraw your money.
It’s also a good idea to incorporate different types of long-term investments into your overall plan. For example, you could allocate money to our brokerage account to save for a downpayment on a house in ten years while regularly contributing to your 401(k) or IRA.
Continually reevaluate your financial priorities and goals to see how you can use investments for the short term and long term. But only start exploring new opportunities when you have stable emergency savings in place.
Is Fine Wine a Short-term Investment?
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Wine investing also makes sense for individuals who enjoy wine and incorporate an alternative asset into their portfolios.
How Do You Succeed at Short-term Investing?
Short-term investing can help you save money when you need to reach a goal within a short window of time. With that in mind, here are a few things you can do to set yourself up for success:
Gauge Your Risk
When you are strategizing for a period of three years or less, it’s wise to reduce the risk in your investment portfolio or plan as much as possible. Keep in mind that a market or business cycle typically lasts more than three years, meaning your money usually won’t have enough time to recover from the loss that could come from higher-risk assets.
Take, for instance, the “dot.com” crash that caused the S&P 500 to drop more than 35% between 2000 and 2002. The stock market did not fully bounce back until 2006. In other words, when you only have up to three years to invest, you can set yourself up for potentially poor outcomes by choosing more volatile assets.
Consider Your Horizon
Your specific time horizon should also influence your short-term investing decisions. The assets or opportunities you choose should align with your investment timeline—whether your horizon is three months or three years.
For example, you could explore AAA-rated corporate debt bonds or short-term government bonds if you're trying to make a downpayment on a house within six months.
Choose Your Instrument
It’s hard to beat cash when it comes to managing liquidity and risk for short horizons. If you are operating with fixed-income, look to short-term bond funds and other securities that mature within three years.
Individuals often incorporate short-term investments in their plans because they can come with less risk and provide more time for their money to bounce back from drops in the market. With that said, investing for the short term is ideal if you already have long-term strategies in place or you need to accrue extra cash within a short timeframe.
If you are looking to bolster your investment strategy, consider investing through a platform like Vint, which allows investors with any budget to get into the fine wine game. All of our shares are SEC-qualified and offer access to the best wines in the world.