Long-Term Investments vs. Short-Term Investments

Choosing between long-term and short-term investments is really a question of what you need your money to do, and when you need it. Short-term investments generally focus on stability, liquidity and preserving principal, while long-term investments are often designed to pursue greater growth over many years. The right mix can depend on your goals, risk tolerance and time horizon, whether you are saving for a home in three years or retirement several decades from now. Understanding how each approach works can help you decide where to keep your money and how much risk makes sense for each goal.

For help setting up a portfolio and finding the right mix of investments, consider finding a financial advisor.

The Basics of Long-Term Investments vs. Short-Term Investments

Generally speaking, short-term investments are ones held for less than a year, while long-term investments are held for more than a year. Both short- and long-term investments could be in any asset class, but some assets are more likely to make sense as one or the other. Stocks, for instance, could fit in either asset class. If an investor believes a stock is going to get a brief bump in value, they could buy shares and sell them when they believe the stock has reached its peak.

One example of such a short-term investment would be someone who bought shares of Gamestop at the beginning of the Reddit-fueled movement to prop up the value of the stock in 2021 to hurt institutional investors who had shorted it. If an investor sold it once the value had gone up, they would have made money by holding the stock for a very short time.

On the other hand, if an investor finds a stock they believe will grow slowly over a long period and holds it for at least a year, selling, for instance, closer to retirement age, that is a long-term investment. Bonds are generally long-term investments, though there are short-term bond funds in operation.

Short-Term Investment Pros and Cons

Short-term investments are generally designed for money you expect to use within a few months to several years. Common options can include high-yield savings accounts, money market accounts, certificates of deposit and short-term bonds, with the main goal often being to preserve principal while earning some return.

One advantage of short-term investments is liquidity. Depending on the investment, you may be able to access your money quickly without taking on the same level of market risk that can come with stocks or other long-term assets. This can make short-term investments useful for emergency savings, a home down payment or another goal with a relatively close deadline.

The tradeoff is that lower risk often comes with lower return potential. Short-term investments may struggle to keep pace with inflation over long periods, which can reduce purchasing power if the money remains invested conservatively for too long.

Taxes can also affect returns, particularly when interest is taxed as ordinary income. And while short-term investments are generally less volatile, they are not completely risk-free. Interest rate changes, inflation and early-withdrawal penalties on certain products can all reduce the value or flexibility of the investment.

Long-Term Investment Pros and Cons

The biggest pro of long-term investing is that there is a lot less risk than with short-term investments. If you’re planning on holding an investment for 20 years, it doesn’t matter if there is a recession in year seven – as long as the overarching economic system holds up, history shows that you will be up in the long run.

The other major pro is that you’ll pay less in taxes when you do cash out. Long-term capital gains are taxed at between 0% and 20%, so the government will take less of the money you earn than if you’d made money more quickly.

The con of long-term investing is that with lower risk generally comes lower reward. Your earnings could be degraded by inflation over the period you held it, and the chances for a huge gain are much smaller than in a market-timed investment.

Long-Term Investments vs. Short-Term Investments: Which Is Right for You?

Choosing between long-term and short-term investments largely depends on when you expect to need the money and how much risk you are comfortable taking. Short-term investments may be better suited for goals that are only a few years away, while long-term investments can make more sense for objectives such as retirement that may be decades in the future.

If preserving principal and maintaining easy access to your money are top priorities, short-term options may be more appropriate. Savings accounts, CDs and short-term bonds can offer greater stability, but they generally provide less growth potential than investments such as stocks.

Long-term investing gives your money more time to recover from market downturns and benefit from compounding. That can make a diversified portfolio of stocks, bonds and other assets more suitable for investors who can tolerate short-term volatility in exchange for potentially higher returns over time.

Many investors use both approaches at once. Money for near-term expenses can be kept in more conservative investments, while funds earmarked for distant goals can be invested for growth. Matching each investment to a specific goal, timeline and risk tolerance can help create a more balanced financial strategy.

Bottom Line

Short-term investments are held for less than a year, while long-term investments are held for a year or longer. Generally speaking, long-term investments are the best option for most individual investors, while short-term investments can be used if you are savvy enough to exploit openings. Consider working with a financial advisor to help you determine the right mix of investments to reach your goals.

Investing Tips

For help building a portfolio of various investment types, consider working with a financial advisor. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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