The investing world can be an intimidating one for newcomers to financial thinking. This is understandable since much of the discussion around the practice is couched in confusing language, complex calculations and obscure analogies. But investing as a practice is a broad one, and an extremely smart thing to devote time and attention to.
This is truer now than ever, with high inflation and high-interest rates alike creating a unique and difficult economic situation in which to save. Investing is an active way to make savings work for you and can be done in a variety of different ways – some of which could defeat the pseudo-devaluing impact of inflation on tranches of your saved money.
There are multiple ways in which investment channels and opportunities can be subdivided, but here they are split into two key types: long-term, and short-term. What are the merits and demerits of each, and how might you apply them to your own investment journey?
Long-Term Investments
Investing for the long term is a relatively passive route to capital gain generation. One key mechanism behind long-term investing as a successful strategy is a compound interest, particularly if investing via a savings instrument like a stocks and shares ISA.
The core principle is to choose an asset, stock, fund or other investment vehicle with low risk, that is near-guaranteed to grow in a stable manner over time. Rather than chasing swift market movements, you are aiming for low-risk growth over a span of decades. Doing so through an ISA allows you to benefit from tax exemption; eventually, interest due will pass the personal allowance threshold, and be subject to taxation – but ISAs eliminate this cost.
Short-Term Investments
Short-term investments, meanwhile, can come in a number of forms. The one with which the average person might be most familiar is day-trading, or the buying and selling of stocks within short time periods to profit from swings in the market. This is a high-risk strategy and one with relatively inconsistent yields for even the most experienced traders.
The other, more useful form of short-term investment is an investment in assets or instruments with high liquidity, such as bonds or even peer-to-peer programmes. This form of short-term investment does not necessarily yield high returns but can be more readily liquidated to better serve cashflow purposes – something that a business might find useful.
In Conclusion
For the individual investor, long-term investments tend to make the most sense. Generally speaking, your goal as an individual or ‘retail’ investor is to save for longer-term goals such as a home, or retirement – making compound interest and safe investments a wise decision.
However, if your goal is to safely store away income from a new business or venture, and to have ready access to it when cash flow is necessary, short-term investments can be a solid addition. As long as risk is spread, though, you can do little wrong.
