Investments are good ways of creating and diversifying incomes. The journey to financial stability and staying on track for retirement needs begins with an investment plan. However, as important as investments are, it can be frustrating when they are expected to grow and they don’t or we think the value of the investment won’t fluctuate much, but it does. Some of these frustrations could be allayed if we take extra time to get more familiar with the nature of our investments be it long-term or short-term investments.
The first step in investing would be to understand your investment goal. You have to know what you are investing your money for/in and what you want out of it. That being sorted, you will need to decide whether a long term investment would be the best to meet your needs or a short term investment is the way to go. Here’s a breakdown for those who are undecided between investing long term or short term.
According to moneycontrol.com, long-term investments run between 3 to 10 years; meaning any investment shorter than that is considered short term. Being a long-term investment means that you are willing to take a certain level of risk and you can afford to be patient for a longer period of time in exchange for potentially higher rewards.
If your goal is to reach long term needs like securing your children’s educational fund, living a comfortable life after retirement or leaving a legacy for your children, a long-term investment would cut it. On the other hand, a short-term investment would be more suitable if you will need some money to meet immediate needs such as buying a car, taking care of wedding expenses or funding vacations.
To be able to sustain any type of investment, it’s important that you are comfortable with the level of risk involved. Taking too much risk is not advisable, but too little risk can also be a mistake. Adjusting your tolerance for risk is one of the key ways to manage your investments.
To minimize risk, ensure that your investment have a timeframe. Putting a timeframe on your investment goals will help to determine how much risk you should allocate to your various investments. Simply put, you can take more risk and invest in less liquid assets for long term investments. However, for short term, you may want to invest in assets that are less risky and very liquid.
A liquid investment is “an asset that can be easily converted to cash with little impact on its value”. For example, the Eterno project investment by Heart and Capital is liquid, while an apartment is not. The Eterno investment can be sold as long as the farm lot is open for sale, while an apartment may take a lot of months and enormous costs to be sold at the right value.
It is important to note that long term investments have the potential for compounding. That is; the more your money stays invested, the greater the prospect for it to grow. Even when compounding can have a significant longstanding impact, there may be periods where your money won’t grow much or as expected. However, when you subscribe to a short-term investment, you are generally not expecting much in the way of return or an increase in value.
More importantly, If you want to build wealth and be financially stable, you should consider investing so as to stay ahead of the yearly increase in prices of commodities and to enable you to prepare well ahead for retirement. For smart investing, you will need a mix of both investment vehicles and understanding the differences between them would provide better idea as to what to expect from your investments and this can guide you in making your investment decisions.