A deep dive comparison of short and long-term investing—what’s the difference, and which is best for you?
Investing can be tricky, and there are plenty of different philosophies for approaching it best.
Most investors and financial professionals swear by the long game, touting the benefits of a slow and steady approach. Some folks like the thrill of uber-risky opportunities and advocate for seizing those glistening short-term opportunities, taking advantage of market fluctuations to maximize gains. We think the best approach is a diversified balance of long-term growth and short-term gains, with a heavy lean on the long-term ones.
Let’s explore the pros and cons of short- and long-term investing and which strategy best fits your personal investment goals.
Long-term investments include sustainability, reliability, lower volatility, consistency, more predictable returns, a track record of excellence, transparency, and simplicity.
Basically, long-term assets aren’t those that are here today and gone tomorrow but are established mainstays that can carry a portfolio for decades. They should be easy to understand, provide solid, reliable returns, and not be erratic. A long term investor thinks about holding their positions for a while, despite what they hear in the financial news. And many short-term investors try to time the market, trying to call when the best time to get in and out of the market or positions may be. And that is damn near impossible.
Advantages of a long-term strategy
The main advantage of choosing a long-term strategy over a short game is the lack of excitement. For some, this may seem dull, but for most investors, that mundaneness is highly welcome and often indicative of financial stability.
Drawbacks of long-term investments
Short-term trades often provide us with an allure of upside that rarely comes to fruition in reality. Yes, refraining from short-term investing will cause you to miss out on some big runners, but this is rare for most of us. Nevertheless, sticking purely to the long game will inevitably create a fear of missing out on some investors.
One of the requirements of long-term investing is that you invest for a long time. The tenure of your portfolio is what gives this mundane strategy its valiant returns, and years of compound interest are required for it to all be worth it.
Short-term investing—a risky undertaking
Short-term investments tend to be unsustainable and unreliable, bringing higher volatility and erratic, unpredictable returns.
Short-term investments are here today and gone tomorrow, and it’s precisely that volatility that leads to the lucrative upside for those who dare take the risk to pursue.
The appeals of short-term investments
The allure of short-term trading is purely in its potential for a more significant profit compared to a more long-term asset. But remember: with high reward comes high risk.
Another interesting aspect of short-term investing is learning the tricks of the trade—literally. Active trading forces you to learn about how markets and investor psychology work.
The drawbacks of short-term investments outweigh their upside
Simply put, short-term investments are risky, and it's tough for an individual investor to get these "right." A stock that has the potential to run up 50% in a day also has a higher likelihood of dropping by a similar amount in the near future.
Which one is right: short-term or long-term investing?
While there’s no singular correct route to investing, most financial experts will lean heavily on long-term investing. Even the best short-term traders acknowledge the importance of a passive, long-term portfolio.
A slow and steady long-term approach is the way to go. The long-term road is safer, and if you’re diligent in your practice, it can provide enough returns to secure a fulfilling retirement.
What to consider when building your investment strategy
Even though both methods have appeal, most would acknowledge that the stability and safety of a long-term portfolio take priority over short-term opportunities. Before gambling on trading, ensure you’re investing early and consistently, saving for retirement, and planning and saving for the future.
Once you’ve checked off the basics, move on to what other things you’d like to accomplish with your investing. If one of those goals is to become proficient and profitable at shorter-term trades and you’re financially secure elsewhere, it might make sense to give it a shot.
Done responsibly, your finances can and should dictate how you can invest. If you’ve only got enough extra income to max out your retirement account this year, it’s probably best to stick to the long-term game. In contrast, if you’ve got disposable income, you can diversify into other areas like active investing.
Your risk appetite will also help determine what works best for you and if short-term investing fits your preferences. Investing actively and holding single stocks makes your portfolio more prone to volatile movements and mayhem than those broader holdings often associated with more passive methods.
There’s no right way to invest, and everyone’s exact approach is unique to their situation and needs. However, we're here to share the guidelines that will shape your finances for the better over the long run.
Keep your discipline going. Your Pocketnest app is a great place to start. Don’t forget to log in, update your goals, and keep your to-do list checked off as you continue your journey to financial freedom.