When it comes to investing you have to set your goals right and know how much risk you can tolerate. It is also important to know the type of investment you would like to make. The type of investment can have an impact on your portfolio, for example, it gives a clear idea of whether you are focused on long-term investments or short-term investments or a mix of both. Knowledge of long-term and short-term investment and their pros and cons can help you achieve the exact type of investment you are looking for.
Long-Term Investment V/S Short-Term Investment
Basic Differences Between Long-Term and Short-Term Investment
Understanding long-term and short-term investment is simple. Short-term investments are assets that the investor holds for a year or less. For example, a trader who holds stocks just for a few days before selling them is a short-term investment. Long-term investments are assets that the investor holds for a year or more. A 401 k plan when held for several years is an example of a long-term investment.
Pros and Cons of Short-Term Investment
When it comes to portfolio short-term investments can be useful. If short-term investments are strategies and handled correctly then they can bring in amazing returns within a short period of time. These returns can be reinvested and can help grow the value of your portfolio. On the other hand, short-term investments do carry a substantial and heavy risk. After buying the stock if the value of the stock decreases or if you miss the perfect time to sell your stock or mistime the market then you can face great losses. And if you manage to make money out of short-term investments the high taxes are ready to chase you. A regular income tax is applied on short-term gains, whereas long-term investment gains have a different tax rate. So even if you get a good return on your short-term investment the taxes might take away a major portion.
Pros and Cons of Long-Term Investment
Long-term investments carry a lot lower risk when compared to short-term investments. And if plan to hold your investment for a huge period of time like for 10 years or more then the impact of the recession on your investment is almost negligible (as long as the recession does not last long and the economic system is able to run back to normal.) Another big pro of long-term investment is that when you cash out your investment you will pay less tax. Usually, the tax upon long-term investment is between 0% to 20%, so at this rate, the government would not get the major portion of your earnings. But long-term investments do have cons as well, and with lower risk sometimes comes lower reward. Sometimes your earnings can be affected by inflation of the period you were holding the investment. And this inflation can reduce the chances of huge gains when compared to timed market investment.
When long-term and short-term investments are compared for the majority of people long-term investments make more sense. Short-term investments require a lot of attention and significant money at risk. If you decide to make a short-term investment then make sure you do intense research and have a financial advisor by your side. We also suggest having a long-term investment for the base of your portfolio.