Authored by Casey Quinn in Investments
Published on 01-19-2009
Long term investments will generally appreciate more than short term investments while providing lower risk options. So why should you bother including short term investments in your overall strategy? Because without them, you may need to interrupt your long term investments to pull out money for other needs.
Most long term investments focus on one thing, retirement. However in life there are a number of large expenses that need to be covered anywhere from income, home repairs, children’s education and other expenses that require you to come up with a large amount of money in your life. Relying on long term investments will leave you open to anything that happens between now and then. Short term investments, when included in a diversified investment strategy, will close the gap.
Short term investments can include money that has been invested for months or a few years and used primarily for the following two reasons.
Treat it as a better home for your savings: Money saved in a regular savings account these day earn next to nothing. In fact, with inflation you potentially lose money if you leave it in there. Finding the right short term investment for your savings is a better option as it will give you a higher return while the funds are still available for your needs. The most common example for this is the emergency fund. Everyone should have one but why keep it sitting around collecting dust? Why not put it to work for you in a low risk short term investment such as treasury bills, certificates of deposits or money market funds. These all will give you more bang for your buck then leaving it under your mattress or in savings account.
High risk, quick money: For those who have a high tolerance for risk, certain short term investments are a good place to invest your money. Certain investments like real estate can be purchased and flipped in a short period of time with a large return on the investment. Again, there is much more risk involved with this, but the gain (if you are successful) will outweigh it depending on the economy. Stock trading is another great example where active investors can buy and sell stocks within minutes to see a gain on their investment. Risk is very high as the money can be lost in the same amount of time. A pitfall that goes along with day trading and real estate is their tax implication. Investors may find themselves owing the government large chunks of their gain at the end of the year.
These reasons are not meant to say short term investments are the only way to go. You should do long term investments but to be well balanced, you should also invest in the short term. Each form of investment balances out another form of investment. The more balance your overall strategy is, the more likely you are to succeed. Save for the long term so that you can retire, but use short term investments so you live in the meantime.