Part of: Investment Time Horizon
What is the difference between long and short-term investments? Time horizon is critical when it comes to investment choice. The desirability of characteristics and features depends on the term. Before choosing an investment, you should be aware of these details.
Investment time horizons are either contractual or non-contractual. For example, if you invest in a five-year CD (Certificate of Deposit), that is contractual. The contract is to maintain your deposit for at least five years. If you withdraw your money early, you’ll be penalized. If you invest in the stock market, it is non contractual. There is no penalty for short-term trading (day trading is a possible exception if you do not meet minimum requirements), but given the nature and volatility of the stock market, it is generally considered a long-term investment for most people. This is because over the long-term probabilities determine performance. Read more about long-term and short-term investments:
Short-Term Investments: Low Risk, High Liquidity, Low Return
Long-Term Investments: High Risk, Low Liquidity, High Return
There are no freebies. If you want a higher return you’ve got to take on more risk and/or give up some liquidity. If you want to reduce risk you’ve got to accept lower returns. If you want high liquidity you’ve got to accept lower returns and utilize lower risk to ensure you preserve asset value.