Choosing the right investments depends on the timing of your goals.

Short-term and long-term investments can both play an important role in financial planning. Understanding the difference between each can help you choose which are best suited for achieving your goals on your timeline. Here’s a quick overview.

The difference between short- and long-term investments

Financial advisors disagree on what short-term investing means. For some, it’s less than a year while others say it’s anything less than three years. Regardless, it’s a relatively short duration in the context of a career or lifetime. Short-term investments are useful for building savings for things like an emergency fund, vacation or down payment on a car.

From the perspective of the IRS, any investment held longer than a year is considered long-term. However, when setting financial goals, many people look at long-term investing as way to plan for events that are more than three years way. For example, they might be saving to pay for a child’s education, buy a home, start a business or retire.  These events might be decades away.

How short-term and long-term investments are used

By definition, short-term goals mean you’ll want to use the money sooner rather than later. For this reason, short-term investments means choosing less risky options, so your capital is preserved. Certificates of deposit (CDs), money market accounts and treasury bills are some of the safest ways to invest and earn interest on savings short-term. In general, these investment options also allow fast access to cash, although there may be a penalty for cashing in a CD or Treasury bill before its maturity date.

Typically, long-term investments come with greater risks as well as the potential for higher returns. Categories for long-term investing include stocks, real estate, long-term bonds, mutual funds, bonds and more. Often, these investments are a major portion of retirements accounts such as an IRA, 401(k) or SEP pension plan. By holding investments over several years or even decades, investors can benefit from compound interest as well as weather the ups and downs of markets. For example, over the last 100 years the S&P 500 has averaged 10% annually. While some years the S&P 500 lost value, the years of gains outweigh the those with losses.

What’s the right mix?

The right mix of investments is unique to each person and their goals. Stop by an office or call us at 800.991.2221 if you’d like to chat.

 

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