If you are looking to grow your wealth through investments, deciding between long-term and short-term investments will be an inevitable encounter in planning your strategy to reach your financial goals. To help you make smart decisions according to what you want to accomplish and to make the most out of the investment opportunities coming your way, let us help you learn about the key differences and between the two.
Short-term investments are commonly referred to as “marketable securities” and “temporary investments.” They are easily convertible into cash, usually within a period of one to three years or less. These may include high-yield savings accounts, money market accounts, government bonds, and treasury bills – all of which offer lower return rates, yet, are highly liquid. They may also refer to company holdings that one intends to sell within just a year.
The main purpose of engaging in short-term investments is to protect one’s capital, while ensuring income-generation by allowing an investor to pull out and withdraw his/her assets easily when needed. However, this requires investors to constantly monitor temporary market fluctuations, necessitating the knowledge and expertise of financial investment firms.
Short-Term Investments: When Ideal
Short-term investments are best in planning and financing your short-term goals, such as making an initial deposit for accounts or making a downpayment for a home or a car. They are less risky, allowing you to keep your money in the market, enable it to generate income, and withdraw your returns once you need them without fear of market losses.
Short-term investments are also ideal for income-generation. Although they do not generate as much returns as stocks in bigger markets, you can nevertheless have another source of income you can count on without risking your assets to market volatility.
Long-term investments are assets that a person or a company plans to hold for a longer period of time, usually for more than three years. These may include stocks, real estate investments, bonds, and cash. Unlike short-term investments, these allow investors to generate higher returns under greater risks, usually due to declining market values.
When are Long-Term Investments Best
Long-term investments provide greater opportunities for growth since you will have to keep your assets in the market for a significant period of time, allowing it to generate higher yields and returns. Here’s when it is best to engage in it:
- Planning for the Future
Long-term investments are best for your future plans in the next ten to twenty years. These may include educational plans for your future children or a retirement plan to secure your senior years. Since they are a great means to help you grow your assets, engaging in long-term investments for your plans in the future will allow you to generate more income than short-term investments, ensuring that you fund your plans with more than enough assets.
- Beating Inflation
Prices in the UAE have been increasing, with average consumer prices expected to increase by 3.7% by the end of 2022, up from 0.2% in 2021. As prices continue to rise, the best way to beat the inflation would be to engage in long-term investments, such as treasury bonds, which keep pace with inflation. This will allow you to put your assets in the market for a longer period of time, where you earn interests to help you keep up with increasing costs in the future.
Short-Term vs. Long-Term Investments: The Bottomline
There really is no hard and fast rule as to what between short- and long-term investments you should be engaging in. It all really depends on your goals, and what you plan to do with your money after generating returns. To guide you in making a sound decision, reach out to one of the top investment companies in the UAE, AIX Investment.