Long term vs short term investment – both have their own pros and cons. If you want to build real wealth, then the long-term investment is the best option. As the risk will decrease over a period of time. While in short-term investment, there is a double-edged sword.
In the stock market, there is no shortcut to building wealth. In the short term, you may get good profit out of stocks, but that is not a sustainable way to build real wealth. If you are investing your hard earn money into the stock market, then you should be sure of the returns you will generate out of it.
Market experts suggest doing appropriate research before making investments in either form. What’s suitable for another investor might not be in sync with your overall investment aims and objectives. So you must take into account your overall financial goals along with the risks that you are willing to take. Read on to understand the various facets of long-term and short-term investments.
There are two types of investment options, long-term and short-term investment options. Long-term investment options usually rely on the fundamentals of the company and its management. While in the short term, there is a wave due to some news, or the event base gain that you can expect.
Long term vs short term investment
What is a long-term investment? A long-term investment is a strategy wherein the investor will remain invested for a relatively long period. This period is for several years, typically for more than 5 years. Due to the length of the investment period, the market will absorb all the ups and downs and provide higher returns as compared to the short-term investment.
There are many advantages of investing in the long term like, you will have lower risk and higher return. Also, you can invest in the equity market with lower risk. You can even average your buying when the market is down. This way you can compound your investment in the long run.
What is a Short-term investment? As the name suggests, the short-term investment is for a shorter period of time. Usually, it is for less than 3 months. Some investments done for 2-3 years are also called short-term investments. Investment strategy for the short-term is based on the technical analysis of the stock price movement.
Market risk in the short term is higher as compared to the long-term investment. All the investments are done in the debt instruments like government bonds, liquid funds are called short-term investments.
Short-term investments are done without any future goals. It is just for instant gain. These types of investments are risker than long-term investments.
There are many people nowadays who invest in IPO just to get the listing gain. While some others are investing to keep that stock for the lifetime (at least for > 5 years). There is a basic difference in both the type of investors, one has a mentality of getting rich quick while other wants to create wealth.
Long term vs short term investment comparison
| Long Term Investment | Short Term Investment |
|---|---|
| Investments are done for higher than five years | Investments are done for less than five years |
| Based on the fundamental of the stocks | Based on the technicals of the stocks |
| Less risky | High risk |
| Best for creating a wealth | Best for short term gain |
Let me show you the performance of some of the leading stocks for last ten years.
| Stock Name | 2010 | 2020 |
|---|---|---|
| Bajaj Finserv | 420 | 8900 |
| Bajaj Finance | 75 | 5290 |
| HDFC Bank | 220 | 1400 |
| Kotak Bank | 200 | 2000 |
| Titan | 300 | 1500 |
| TVS Motors | 66 | 485 |
| Asian Paints | 213 | 2750 |
As you can see the price movement for the last 10 years for these stocks. There are many more stocks that have given even higher returns than what I am showing here.
Long vs Short term investment – What Should You Do?
Both long and short term investment have their own merits and demerits. It all depends on the individual’s future goal and risk appetite. For creating a wealth, you must invest into solid performing fundamentally strong stocks which can give you higher returns in the long run.
For getting momentum gain, you can invest for the short term based on your risk appetite and time horizon. But you should never invest more than 20% of your capital for short-term investment. Rest 80% must be invested for the long term and into solid stocks as I mentioned in the above table.