Short Vs Long Term Investments

There are two basic kinds of investments : short term and long term.

In this article we will look at each of these investments, and later the risks and benefits associated with making such investments.

Short Term Investments

Short term investments involve investing your money somewhere for a short period of time (usually 1-5 years).

The main advantage of a short term investment is that your money will be available to you within a relatively short period.

Long Term Investments

Long term investments involve investing your money somewhere for a long period of time, such as 10 or 20 years.

These generally offer higher rates of return on your money than short term investments, although due to the nature of this type of investment your money will not be available to you for a considerable period of time.

Both short term and long term investments can give you a high rate of return on your money, but you should also be aware that they both carry varying degrees of risk depending on how well you have invested your money.

The Risk Of Investing

When assessing the risk of investing, there is one simple question you need to ask yourself : “how much can I afford to loose if this doesn’t work out as planned?”

Now this might sound like a negative attitude to go into investing with, but asking yourself that simple question could prevent you from loosing all your money and then having nothing left to support yourself with.

Remember, your investment money is your “spare” money, so even if you did loose it all, you should still have enough money to support your current financial lifestyle.

However it should be pointed out that it is quite rare for people to loose all the money they have invested, as if your investment decreases in value it is likely to do so gradually over time.

This means that if you have to option to pull your money out of that falling investment, you will at least be able to get some of it back.

A Calculated Risk

The key point to remember here is to take a calculated risk when you decide to invest in something.

A calculated risk means that you are aware your investment might loose you money, but the risk involved offers the possibility of a higher rate of return than you would get from lower risk options such as low interest rate bank accounts.

In addition to this it is also worth mentioning that if and when you do start to invest your money, you can reduce your risk by diversifying your investment portfolio.

Basically this means not putting all your eggs in to one basket, so that if one investment goes bad, you have other investments to fall back on.

Are You A Low Or High Risk Taker?

Let’s suppose you have £1000 to invest and you choose to take a calculated risk by investing it for one year, rather than keeping it in a savings account.

If you think that you can afford to loose no more than 6% of that investment (£60), then you would be classed as a low risk investor.

Low risk investors are generally people who do not have a lot of spare money, but want to maximise their net worth by taking a risk and investing it.

But because they do not have much money to spare, they want to take as few risks as possible and so go for the low risk options.

High Risk Investors

If on the other hand you think you could afford to loose up to 25% of your investment (£250), then you would be classed as a high risk investor.

High risk investors are generally people who have a lot of money to support themselves with, and so can afford to take higher risks without jeopardising their financial security.

However not all high risk investors have lots of money to spare, as some people deliberately choose to take high risks so that they can get a higher return on their investment.

Sometimes this tactic can work very well, but if it doesn’t and you have no money in reserve, then could find yourself in a very dangerous financial situation.

For first time investors, high risk investments are generally discouraged for this reason.

The Higher The Risk, The Higher The…

Although I have used £1000 in the above example to simplify things, in reality people can invest much larger sums of money.

So whilst it’s not necessarily the end of the world if you loose £150 on your £1000 investment, loosing £7,500 on a £50,000 is something most people wouldn’t be too happy about.

So as a general rule, just remember that the higher the risk the higher the rewards and the higher the potential losses you could face.

Basically that’s what investments are, a calculated risk which could either make you money or loose you money.

The Rule Of 72

One final thing you should be aware of before moving onto the next article, is the Rule of 72.

The Rule of 72 simply means how long at a given rate of return will it take for the money you invest to double.

For example, if your investment pays you a 10% rate of return, then you will have doubled your money in 7.2 years.

This is calculated by dividing the rate of return by 72 (72/10 = 7.2 years).

The Rule of 72 should give you a general idea of whether or not an investment is a good option, and how well your current investments are doing.

Usually you will find that the sooner an investment can double your money, the more risk it will contain.