Differences between investing in the short, medium, or long term
In the world of investments, it is very important to determine our time horizon since the strategy that we will use will depend on the time that we are willing to invest our money. For example, if my goal is to invest to pay my car payment next month, I could not invest in stocks due to volatility; if the destination of the investment is retirement, investing in stocks would be a mistake; if we invested to pay a down payment on a house within two years, we could diversify partly into debt securities and partly into stocks.
What time horizon is the best fit for my needs? In this post, we analyze the differences between short, medium, and long-term investing so that you can choose the mode that best suits your investment portfolio.
What differences exist between investing in the short, medium, or long term?
The main difference lies in the time that elapses between investing and withdrawing the investment. Let’s see it in detail:
What is short-term investing?
When we talk about short-term investments, we usually refer to a type of investment with a term of less than one year that usually obtains a low return accompanied by low risk.
Most of the time, when talking about this type of investment, we use government debt instruments as a reference, such as 28-day cetes (in Mexico), which are instruments that are purchased at a lower price and will reach maturity or a price maximum within this period of 28 days.
What to invest in in the short term
Depending on the profile of the investor and the objectives, we can see that there are different options to invest. As already mentioned, we have 28-day certificates; however, there are many more instruments to invest in that will have a higher yield but come with greater risk, such as stocks, forex, commodities, and cryptocurrencies. Of course, these are not highly recommended from the point of view that this type of investment does not seek high risk.
Stocks to invest in the short term
To invest in the short term, we first have to take into account what our objective is. From there, we can begin to create a strategy to find those assets that will adapt to our plan. Although we could choose something as volatile as a cryptocurrency, in this type of investment, what we regularly look for is liquidity and low risk, so it would not be the most advisable to invest in one of these assets.
In this case, although it could give us a much higher return, we are looking more than anything to protect our capital while we have some liquidity. That is why government bonds are the protagonists of this type of strategy.
These types of strategies are focused on people who need to have their resources available immediately; they are even recommended for company treasuries, company savings banks, or savings funds since they require liquidity and security.
Invest in the medium term.
Since we can have a small position in shares and the remainder of the portfolio in government and private debt instruments with a medium-term investment horizon of 1–2 years, we can invest a little part in variable income.
Types of investment in the medium term
Normally, in a medium-term portfolio, the weighting given is 70% in fixed income and 30% in variable income, since the liquidity required is not so immediate.
Longer-term bonds, investment funds, and shares with predicted growth are suitable for this sort of investing.
Invest for the long term.
In the long term, we have enough time and room for maneuver to invest in more dynamic instruments such as shares, ETFs, Fibras, derivatives, commodities, currencies, and even bonds, since we have the necessary time to let the instruments mature. investment.
How to invest for the long term
We must take into account that a strategy focused on more aggressive instruments is susceptible to greater volatility, but at the end of the term, we will obtain a good return. This type of strategy is ideal when our horizon is retirement or the creation of wealth.
In general, this is where there is the greatest opportunity for continued growth, both from dividend accruals and from bond and fund yields.
This type of investment is the one that fundamentalists prefer, as well as the type to focus on blue-chip stocks (shares of stable, reliable, and constantly growing companies) such as JP Morgan or Apple.
Differences between short- and long-term investments
Besides time, the main difference is focus: one is on liquidity, the other on value generation.If we have a stock that pays dividends and another that has a significant increase in value, the dividend-paying stock should be our long-term strategy, while the growth stock should be our short-term strategy (of course we would have to evaluate more factors).
So when it comes to what type of investment is right for me, It will depend on your strategy and goals.