Friday, April 3, 2020

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There’s a big difference between long term and short term investments. Long-term investments are assets that you plan to hold for more than three years. Short term, are those you want to keep for a few weeks or months. 

While short term investments can yield tremendous returns, there are good scientific reasons for choosing more protracted time horizons. Here’s why.

The Market Is Volatile

Over the decades, the market always seems to yield returns. That’s a historical rule, and it looks like it will continue so long as there are new companies, technologies, and markets. In the short-term, however, things can be choppy. There’s a lot of noise in the system that it can be hard to tell whether your investments are paying off or not.

This volatility is something that makes short-term trading so much more difficult. It is not enough to understand the underlying fundamentals of the assets you buy. In essence, you need to wrap your head around investor psychology too. A perfectly good stock can spend years in the doldrums before investors discover that it has potential. Just look at what happened to Intel rival, AMD. Five years ago, the company’s stock was nowhere. Now it’s riding high. 

The Market Is Cyclical

Experienced investors, like Ray Dalio, believe that the stock market is cyclical. Central bank policy and natural uncertainty conspire to create undulations in the market.  The ups and downs are different each time, but the underlying forces driving them are the same. 

Interestingly, the market always recovers from these episodes. Even after the Great Depression, when stock prices plummeted 87 per cent from peak to trough, people still made all their money back and more. All they had to do was stay in the market and ride it out. 

It Is A Safer Investment Option

Finally, long-term investing tends to be a safer option. Historical trends, if carried forward, suggest that eventually, you’ll make money. Yes - it might take a long time - more than ten years, but ultimately, it’ll happen. 

Why Invest Short Term? 

So, if there are all these benefits for long-term investing, why do people participate in the short term market. 

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It all comes down to the risk-return tradeoff. If you buy an asset to hold for just a couple of months, you automatically accept a higher level of risk. In exchange, you’re compensated by a higher return. That’s why so many people use a forex broker. They stand a much better chance of making double-digit gains to their portfolio every year than merely leaving it passively in stocks for the long-term. 

So which should you choose? 

It all depends on your immediate goals and risk tolerance. If you’re saving for something important, like your child’s college fund, then you probably want to stick with a long-term strategy. You don’t want them to get to age eighteen, only to find there is no money in the kitty. 

If, however, you’re young, free, and don’t have any financial commitments, you might want to take more risks. Prepare yourself, though, for losses. There’s no guarantee you’ll time the market. 

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