At various times, many people may feel frustrated by the performance of their investments. For example, they expect growth, and they don't get it — or they think the value of their investment won't fluctuate much, but it does. However, some of this frustration might be alleviated if investors were more familiar with the nature of their investment vehicles. Specifically, it's important to keep in mind the difference between long-term and short-term investments.
What defines long-term and short-term investments? Long-term investments are those vehicles that you intend to hold for more than one year — in fact, you generally intend to hold them for several years. On the other hand, you usually hold short-term investments for one year or less.
You can find several key distinctions between short-term and long-term vehicles. Here are a few to consider:
•They carry different expectations. When you purchase an investment that you intend to keep for many years, you may be expecting the investment to increase in value so that you can eventually sell it for a profit. In addition, you may be looking for the investment to provide income. When you purchase a short-term vehicle, you are generally not expecting much in the way of a return or an increase in value. Typically, you purchase short-term investments for the relatively greater degree of principal protection they are designed to provide.
•They meet different needs at different times of life. You will have different investment needs at different times of your life. When you're young, and just starting out in your career, you may require a mix of long- and short-term investments. You might need the short-term ones to help pay for a down payment on a home, while the long-term ones could be used to help build resources for your retirement. But later in life, when you're either closing in on retirement, or you're already retired, you may have much less need for long-term vehicles, with a corresponding increase in your need for short-term investments.
•They can satisfy different goals. If you purchase investments that you intend to hold for the long term, you probably have a long-term goal in mind — such as building resources to help pay for a comfortable retirement or leaving a legacy. On the other hand, a short-term investment would be more appropriate if you know that you will need a certain amount of money at a certain time — perhaps to purchase a car or to fund a vacation.
•They carry different risks. All investments carry some type of risk. One of the biggest risks associated with long-term investments is volatility, the fluctuations in the financial markets that can cause investments to lose value. On the other hand, short-term investment vehicles may be subject to purchasing power risk — the risk that your investment's return will not keep up with inflation.
As an investor, you'll probably need a mix of long-term and short-term vehicles. By knowing the differences between these two categories, you should have a good idea of what to expect from your investments — and this knowledge can help you make those choices that are right for you.