Every time you hear the term ‘short-term investing’, either from your adviser or financial news, you will question its meaning and how long is the short term should be. Short term investing is a common strategy used by investors to get benefits from rising interest rates.
Or else, investors can also lock their funds with a fixed return lower than the market. However, before you jump onto it, you have to clearly understand what qualifies as a short term investment.
The Definition
Generally, short-term investing means holding funds for less than three years. You have to notice that you cannot utilize several investment securities for your short term investment. For instance, stocks, mutual funds, some bonds, and some mutual bonds for an investor seeking long term variety.
Usually, your adviser will give you questions to find out your risk tolerance and goal to decide the best investment type for you. Thus, if you plan to save for a vacation in the next two years, your adviser may suggest you take short-term investing.
The Performance of Short-Term Investment in the Analysis and Research
Before you decide the asset for your investment, you usually do investment analysis and research. During that analysis and research, you should find a one-year period will not give you sufficient reliable insight for specific asset prospects.
The main reason is in one year you will not get enough information about a particular asset ability to guide your portfolio. That information should cover the possible performance of your investment during the recessionary period.
For a full market cycle, we usually need to analyze the market for three to five years. Thus, if you plan to invest for something in the far future, short term investing is not for you.
Exploring Short Term Investment
Now, if your investment goals are with three years or less time horizon than money market funds, certificates of deposit (CD), and short term bonds will work for you.
You should not use assets that work for long term investment. The example for those assets is stock and real estate. Investing in stock is too risky since during a bear market the stock may experience a prolonged of declining prices.