Maximizing Returns: Long-Term vs. Short-Term Investments

The pros and cons of long and short term investments, and how they both can work for you. 

Harry Markowitz, the 1990 Nobel Memorial Prize winner in Economic Sciences, once said, “I only have one piece of advice: Diversify. And if I had to offer a second piece of advice, it would be: Remember that the future will not necessarily be like the past. Therefore, we should diversify.”

Why Diversify

Diversification allows investors to spread risks associated with certain assets and industries. It also allows you to gain returns from various investment sources. 

Broadly speaking, long-term investments typically last between five and 10 years, or even longer. They focus on growing wealth through capital gains. Examples include commodities and real estate. 

On the other hand, short-term investments last between one and three years, with focus on growth through market volatility. Examples include cryptocurrency and short-term bonds. 

Pros of Long-Term Investments 

1. Compound Returns 

Over time, earnings gained from an initial long-term investment can grow exponentially. Say you invest $10,000 and it grows at an annual compound return of 10% over seven years. That means it would have grown to over $19,000 by the end of that period.

However, it is more likely that the returns won’t grow at the same rate per annum. There will be better years, and there will be worse ones. This leads us to the next point.

2. Reduced Risks 

Long-term investing reduces the potential risks of buying and selling assets at the wrong time, which decreases exposure to market volatility. 

JP Morgan Asset Management illustrated this in a study of the S&P 500 index fund from 1993 to 2013. Cited by The Motley Fool, the study shows that an investor who remained fully invested in the fund during that entire period would have gained a 483% return. But if they missed out on the 10 best trading days during this period, the returns would have been a mere 191%.

This shows the wisdom of holding on to an asset for at least a decade, instead of reacting to every ebb and flow of the market.

3. Hassle-free monitoring

Many investors are familiar with dollar-cost averaging method where you regularly invest the same dollar amount in a particular stock over some time, regardless of its changing prices. 

This approach ensures that the cost of investing is averaged out over the long run. It also removes the hassle of closely monitoring stock prices each day, determining how much to invest, and when.

Cons of Long-Term Investments 

1. Opportunity Cost

If you’re strictly a long-term investor, you’ll likely lose out on a few opportunities.

Some investors watch closely for dips and hikes in stock prices so they can take advantage of opportunities to buy during lows, and sell during highs. Market corrections happen frequently, which means that there are often hidden opportunities to invest in value stocks in the short-term. 

Meanwhile, some venture capitalists prefer to be late-stage investors when they believe a company is a few years away from an initial public offering, from which they could profit. 

2. Illiquid cash flow

When it comes to investing, liquidity is king. If you adopt a long- term approach like investing in a property, you are effectively locking up your funds with that asset, until it appreciates significantly. This may become a problem, if investors find themselves in a situation when a large amount of cash is required urgently. 

3. Long lead time required for returns

Perhaps one of the greatest disadvantages of long-term investing is the long lead time required before yielding returns. Sometimes, it can take up to 10 years before rewards are reaped. If you are illiquid or don’t have a diverse portfolio, you might not be able to wait that long.

“Remember that the future will not necessarily be like the past. Therefore, we should diversify.”

Pros of Short-Term Investments 

1. Flexibility to Change Strategy

With short-term investments, one can change the investment portfolio to capitalize potential new growth areas. For example, if you watch industry trends closely, investors can leverage on companies that are about to disrupt the fintech and transport sectors.

2. High Liquidity

Short-term investing allows one to flow better with changing life events. For instance, you might have a financial emergency where cash is needed immediately. Without a buffer, you might be forced to liquidate long-term investments, sometimes at a loss. 

A short-term investor could sell, or expect to yield returns on a quarterly or yearly basis. This allows investors to convert assets into cash quicker than holding long-term investments.

Cons of Short-Term Investments 

1. Increased Risks

Market volatility is often unpredictable. This can lead to massive losses for short-term investors that are highly dependent on buying and selling assets at the right time. 

This is why Warren Buffet holds on to good assets over a long time. Instead of reacting to market fluctuations, you can rely on quality companies to grow profits over the long term.

2. Higher Expenses 

Short-term investing entails brokerage and administrative fees. The more regularly you invest, the more you will require such services, which means higher trading costs in the long run. 

Make Both Investments Work For You

To maximize returns, it is crucial to avoid putting all investable eggs in one basket. Both long and short-term investments can work for you. Keep an eye out for opportunities to improve your portfolio and most importantly, investors should choose the types of asset classes and partners they work with.

For example, P2P lending has emerged as an attractive investment in Singapore, extending private credit from accredited investors to small and medium enterprises (SMEs) that require an amount that is smaller than a traditional bank loan.

P2P lending platforms are regulated by the Monetary Authority of Singapore (MAS), which reduces the risks for both investors and borrowers. In fact, default rates for these financing platforms in Singapore are below 1%. Additionally, investors get back some of their investment monthly, thus offsetting risks.