Investing over the long-term versus the short-term: which is right for you?

The rundown

  • Long-term investing means holding investments for several years to benefit from gradual growth and compounding returns.
  • Short-term investing focuses on frequent trades to capitalise on market fluctuations. 
  • Each approach has its pros and cons, such as differing risk levels, tax implications, and the amount of time and attention required. 
  • Your financial goals, risk tolerance, and the time you can commit are important factors in choosing between them. 
  • Many investors combine both strategies for balance, using long-term investments for stability and short-term trades for flexibility and opportunity.

What is long-term investing?

Long-term investing involves holding investments for several years, often five or more. The aim is to benefit from market growth and compounding returns over time. Compounding returns occurs when investors regularly invest, or if they reinvest their dividends. Investing over the long-term typically:

  • Focuses on gradual capital growth
  • Investors typically buy and sell less frequently than those who invest for the short-term
  • Have lower transaction costs and tax implications
  • Suited to goals like retirement or future home ownership

Superannuation64-01.svgPros of investing over the long-term
  • Potential for compounding returns
  • Less stress from daily market fluctuations
  • May be more tax-efficient (e.g. capital gains tax discounts in Australia for assets held over 12 months)

Rain cloud.pngCons of investing over the long-term
  • Requires patience and discipline
  • Market downturns can still affect value

What is short-term investing?

Short-term investing involves buying and selling assets over days, weeks, or months. The goal is to take advantage of price movements and market trends. Investing over the short-term typically involves:

  • Frequent buying and selling
  • A focus on timing and market signals
  • Higher risk and potential for quick gains and losses

Superannuation64-01.svgPros of investing over the short-term
  • Opportunity to profit from market volatility
  • Flexibility to adjust investment strategy quickly

Rain cloud.pngCons of investing over the short-term
  • Higher transaction costs (due to more frequent trading)
  • Greater tax implications
  • Requires active monitoring and decision-making
  • Increased risk of quick losses

How to decide which is right for you

When deciding whether you should invest over the long-term or the short-term, ask yourself:

What are your financial goals?

  • Long-term goals typically include saving for retirement, children’s education, or building wealth gradually
  • Short-term goals typically include funding travel, building a deposit, or taking advantage of market trends

What is your risk tolerance?

  • Long-term investors may be more comfortable with short-term volatility
  • Short-term investors need to manage the risk of sudden losses

How much time can you commit to your investments?

  • Long-term strategies require less frequent attention
  • Short-term strategies demand regular monitoring and quick decisions

What is your tax situation?

In Australia, assets held for more than 12 months may qualify for a 50% capital gains tax discount. Short-term trades may not.

 

Can I combine both strategies?

Yes, many investors use a core-satellite approach, which allows them to invest over the long-term and the short-term:

  • Core: Long-term investments for stability
  • Satellite: Short-term trades for flexibility and opportunity

This allows for a balanced strategy that suits changing goals and market conditions. 

Learn more about the different investment types and how they can impact your investing strategy.
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