A long-term investment does not have a simple definition because it is
perceived differently by each investor. Any investment strategy that buys
and then holds assets for longer than a year is usually regarded as long
term, although the definition of this timeframe can vary. In short, though,
long-term investments are those which the investor intends to make profits
from in the future.
Investments for the long term are different from those held for shorter
periods. This is because the investor is not counting on those assets to
generate revenue on their current operating activities but rather in a
future rise in the value. Often, these investments are associated with
retirement, or other future planning, though, of course, not always.
More Risk with Extended Horizons
All investments carry some risk, but there is a belief that markets are
easier to predict in the short term. Consider, for example, how
investors’ enthusiasm towards banking stocks would have changed
dramatically from early-2007 to late-2008 after the global financial crisis,
or how today sentiment on the UK economy seems to be much different than
before the Brexit vote.
Even a non-expert can often make shrewd judgments about the short term,
whereas there is a greater element of risk to predicting what happens to a
specific company, asset or overall economic picture a decade from now.
Long-Term Investments Require Patience
While some people say a long term investment logically carries more risk,
they can also sometimes carry more reward. Amazon shares traded for under $2
each when the company first went public in 1997. The last couple of years
has seen Amazon Inc’s share price at around 1000 times what they were
in 1997, reaching a peak of $2,039.51 per share in September 2018. So, if
you bought 500 Amazon shares in 1997 at less than $2 per share, your
investment would be worth close to $1 million today.
However, there are a huge number of stocks and other assets that are
purchased with the idea of holding them for a long period, that do not make
money for the investor. Or, they are bought with the intention of holding
them for 10 years, but the investor sells them earlier when they feel they
are not living up to their potential.
Bargains May Yield Good Results
It follows, therefore, that a strategy of long-term investing is one that
requires some patience and some surplus capital. But, as the example of
Amazon shows, it doesn’t necessarily take much in the way of capital
to make a potential lucrative investment for the future. Indeed, online
trading platforms offered by fintech companies give everyone the chance to
make investments that could potentially earn profits later down the line.
For example, buying cheap stocks and cryptocurrencies now might yield
immense profits in later years if the investor is patient.
Stocks for the Long Term
What, then, are the assets suitable as a long-term investment? As suggested,
stocks, amongst other assets, are often considered appropriate for a long
game. You can, of course, spread your investment portfolio over a range of
companies, which can help lower the risk of losing capital.
Stocks purchased
with the goal of long-term returns are sometimes called growth stocks. Apple
Inc and, more recently, Amazon Inc, are classic examples of growth stocks.
Those stocks that are more focused on short term payouts of dividends, i.e.
a return of the companies’ profits to shareholders, are called high
dividend stocks, essentially the opposite of growth stocks.
A Broad Choice of Investment Opportunities
Buying real estate and government bonds are other examples of long-term
investment strategies. While both are considered reasonably safe, they also
carry risks. Real estate prices can crash dramatically and take years to
recover like we witnessed back in 2007-2008. The risk of bonds is somewhat
more confined to profits alone, related to the attached interest rates and
the relative value of the bond if a central bank raises rates.
Of course, there are other, more modern, examples of investing long term,
such as
buying cryptocurrencies
that are still inexpensive and not yet mature or investing in tech startup
companies.
Choices for All Time Horizons
As you may gather, the main difference between long-term investment and a
short-term investment has to do with the timeframe of potential returns.
Investing in the short term can be all of the activities mentioned above
– stocks, bonds, property, CDs (ISAs) – anything that is
invested in with the view of return in a short period. There can, of course,
be some overlap into what is defined as short term and long term, and there
isn’t a complete consensus on what the timeframe should be to
distinguish between the two.
All of this perhaps overlooks the way modern financial markets are invested
in on a daily basis. Day trading, where online traders will buy and sell
shares with the aim of making profit in a 24-hour period, has become popular
for some traders looking for a hands-on approach to investing, as have
futures contracts, where an agreed price is made on the sale of an asset at
a future date, with profits made and lost if the future price rises or
falls.
In short, the best investment strategy might not be limited to a short or
long term investment horizon, but rather to something even shorter. Your
best option might be a trading style where trades are designed to be
executed within a matter of minutes or hours. If that sounds like a good fit
for your trading goals and needs, you might want to explore trading on CFDs,
a popular trading vehicle known as contracts for difference.
Trading at r1investing via CFDs
CFDs give traders the opportunity to make immediate trades, which they can
keep open as long as they choose. Because CFDs don’t entail buying and
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-
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Plus, at r1investing, we have the trading environment and features both
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investments, investing for the short term and
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