Comparing Risks in Long and Short Term Investments

Long term investors can generally accept greater levels of risk, as time is always available to allow the price to rise again.  In contrast, short term investors have to be able to liquidate quickly, and hopefully profitably, to get their capital out of the markets before any substantial losses are taken.  In this article, we'll review the  different types of short term and long term investing and consider the potential risks.

Short Term Trading

Short term trading is incredibly risky. Day traders and swing traders try to produce a year's worth of returns from a very short trading timeline. Short term traders' investing principle requires that large positions be used to turn minute changes in stock prices into much large account balance changes. Investors with only a short term horizon take much larger risks and have to be very careful of blowback.

Short Term Investing

Investors who only have a few years until they will need their investment capital will, by nature, invest in less risky investments. Short term investing strategy is built around the idea of staying liquid and avoiding any additional risk that is tied to longer term investors. Future retirees often turn to short term bond funds and CDs to provide a return while allowing access to funds within a reasonable timeframe.

Long Term Investing

Investors with a long term outlook can afford to be riskier with their portfolios. When it's early in your road to retirement, investing in the stock market with a small amount of bonds is generally accepted as a proper portfolio. Taking heavier risks when you can afford to lose a bit of money is the best option, as a full growth portfolio will grow the quickest in the first 10 years after it is established, and as compound interest slows, your portfolio will already be much larger than the time you started.

Investing Incorporates Your Risk Tolerance

Investors should know that the market does not work without an acceptance of risk.  Deciding where to invest depends upon how mcuh risk you are willing to assume to make greater profits. Investing 101 will tell us that greater risk generally means greater returns from your investments. There are plenty of people who have made it to retirement with a small mix of mutual funds and huge holdings in fixed income investments.

The important thing to remember is that the more you lower your return outlook, the more capital will have to be dedicated to the task at hand. Accepting an 8% return on investment rather than 10% might be the difference between having enough to retire or running out of cash too early in your senior days. Always conduct some basic calculations on your stock portfolio to figure out your expected return at the time when the money is needed.  By keeping a close pulse on your portfolio and gauging your risk tolerance, you can find a suitable risk-to-reward ratio that meets your investment needs.