What is short term vs long term investing?
Wondering what are the differences between short term vs long term investing? No worries! Short term and long term investing are two strategies geared towards different financial goals and risk appetites.
This post is about short term vs long term investing.
Let’s dive into the top 5 reasons on short term vs long term investing:
1. Time
As the name suggests, short term is holding assets for a short period, usually defined as less than a year (this is important to know for later). Long term means holding assets for at least a year prior to selling them.
2. Risk/Volatility
Next, these are the biggest differentiators between short and long term: risk and volatility. In short term investing, there’s generally higher risk and volatility. Markets are quite unpredictable as it is, and investors can be exposed to sudden market swings. In long term investing, the market usually trends upwards. Albeit, long term investing does not prevent you completely from risk.
3. Strategy
Short term investing usually involves activities like day/active trading. Investors may do a lot of technical analyses to figure out the timing to buy or well. Whereas, long term investing’s strategy is usually to buy-and-hold. What would be purchased would typically be index funds or blue-chip stocks.
4. Liquidity
With short term investing, funds are often more liquid since investments are frequently being purchased and sold. This strategy tends to offer quick access to money. On the other hand, long term investors are not as concerned with liquidity. Investors understand that their money’s going to be tied up for longer.
5. Taxes
Most importantly, the true cost of short term investing will be evident in the taxes. There’s usually higher costs due to short-term capital gains, since the percentage taxed is higher. Any gains from short term investing would be taxed as regular income. Additionally, there could be costs related to transaction fees, which also would dig into your gains. Long term investing costs less over time because long-term capital gains are taxed at a lower percentage.
To reiterate, the top 5 reasons on short term vs long term investing are:
- Time
- Risk/Volatility
- Strategy
- Liquidity
- Taxes
