We save and invest to meet our future needs. These could be to buy a dream home, for children’s education and/or retirement planning. Each of these needs occurs at different points of time in an individual’s life and consequently needsto be planned keeping in mind certain time frames. Most financial advisory literature waxes eloquent about the benefits of long-term investing. Hence, most communication to investors focuses on long-term investing. There indeed is no argument here. Investors who invest with a long-term horizon have a higher probability of meeting their long-term goals and expectations.
However, there is a case for short-term investing as well. “Short-term” can mean anything from several months to two years. Short-term investments are generally characterised as either low yield or high risk, depending on which end of the risk spectrum the investment lies. Short-term investments can be turned into cash or rolled over into other short-term or long-term investments. Investors have short-term requirements and aspirations which need to be fulfilled in the near term. What an investor needs to ensure is that short-term requirements do not derail their long-term investment plan. The paradox in short-term investing is that one might require higher returns to meet near term goals. This encourages investors to invest in high risk instruments in the short-term. However, this is an absolute no-no. The key is to have a short-term investment strategy within a well-diversified long-term investment plan. Short-term investing cannot be ad-hoc in nature. Like other investments, these also need to be planned and aligned with an investors goals and objectives. Create a financial plan that maps out the need for both short-term as well as long-term funds and then arrive at investment avenues to meet these requirements.
Questions you should ask yourself include the following:
As with any other investment time-horizon, when you invest for the short-term, you must focus on risk and wealth preservation. While this makes equity investments an absolute ‘no-no’ for short-term investing, there are various other avenues that an investor can explore including six months to one year fixed deposits, overnight funds ultra short-term funds.