When choosing an investment strategy, estimating your time horizon is imperative. Is your investment outlook three years? Or do you likely have decades until you plan to retire? Knowing your investment time horizon and risk tolerance are crucial elements in the planning process that help to establish a strong financial foundation and serve as key guide points throughout your investment journey.
If you’re unsure, our team at Triumph Capital is composed of the best fiduciary financial advisors in the Denver area and will be able to guide you through the process. Knowledgeable professionals can help you decide whether to choose a mix of short-term and long-term investments or focus heavily on one or the other.
Today we’re scratching the surface on some of the pros and cons of short-term and long-term investments.
Short-Term Investments
Short-term investments are ideal for meeting financial goals within a shorter time frame -typically these positions are held for less than one year. Perhaps you need the money to provide a stable source of income instead of building your overall portfolio. Short-term holdings may include assets such as bonds, annuities, certificates of deposit, and more.
Pros of Short-Term Investments
Compared to long-term investments, short-term investments offer much more flexibility. If needed, these positions can be easily sold and converted to cash. Having liquidity within your financial portfolio can be of great value in the case of an emergency.
People often think having cash reserves that are easily accessible is the best option for emergency financial needs. However, holding cash can ultimately decrease the value of your money over time due to the ever-increasing cost of inflation. On the other hand, if you set aside money in a short-term investment for emergency savings, you can earn interest while maintaining low market risk.
Cons of Short-Term Investments
While short-term investments typically harness a lower degree of risk, they also tend to have a lower rate of return. For instance, most banks currently do not offer noticeable returns on general savings accounts. An individual who solely invests in short-term opportunities can potentially risk running out of money in retirement.
Short-term investments, such as bonds and interest payments, are taxed at a marginal tax rate. This can serve as a disadvantage compared to long-term investments that qualify for capital gains tax when sold. The capital gains tax is generally lower than the ordinary income tax rate.
Long-Term Investments
Long-term investments are those you are likely to hold for an extended period of time (typically one year or longer). They may include real estate, stocks, mutual funds, and more. They provide the opportunity for compound growth and help to ride out bumps in the market.
Pros of Long-Term Investments
Long-term investments make it easier to secure a higher rate of return. They can also be less stressful as you do not need to worry about monitoring the market and fluctuations from day to day. Along with that, less time is needed to manage long-term investments, which allows you to invest your time and energy elsewhere.
Time is often said to be the greatest advantage when it comes to investing, and long-term investments have the advantage of compounding over time to generate higher profit potential.
Cons of Long-Term Investments
If long-term investments are poorly chosen, they still run the risk of failing. All investments involve risk. To some, the fact that these investments take longer to mature can be considered a disadvantage. It can demand real stamina to hold on to certain investments in a rough market.
Another drawback of long-term investments is that they are generally illiquid – not easily converted into cash. Or, if they can quickly be transferred to cash, the investor runs the potential risk of taking on a significant loss. This makes long-term investments a poor choice for fulfilling routine obligations like living and medical expenses.
Contact The Best Fiduciary Financial Advisor in Denver, CO
Our registered investment advisors at Triumph Capital are here to walk you through the process of establishing a financial portfolio that will work for you. Contact us today to book a complimentary consultation or learn more about the financial planning and investment management services we have to offer.
Triumph Capital Management
1610 Wynkoop Street Suite 550
Denver, CO 80202
720-399-5555
TriumphCapitalManagement.com
Advisory services offered through Triumph Capital Management, a registered investment advisor SEC#282814. Insurance Services offered through Triumph Capital, LLC #619821