Short-Term vs. Long-Term Investing, Explained: What's the Difference?

Buying a stock is one thing, but how do you know when to sell? That's where long-term and short-term investing come into play.

One of the most important factors to consider when making investment decisions is your time horizon. An investment that brings high returns over twenty years will not necessarily be as beneficial in just one. On the other hand, short-term investments have the potential to bring higher returns than the long-term market average.

Breaking down short-term investments

Some investments are considered short-term as long as they are held for less than five years and can easily convert them to cash. For example, you might invest in CDs with terms of 12 or 24 months. 

For US tax purposes, short-term investments are any positions held for one year or less.

Day trading is the most short-term investment

Day trading is exactly what it sounds like. You buy a stock and sell it within the same market day.

Day trading requires a significant amount of time to select the best stocks and make multiple transactions per day. This strategy should be taken seriously, so do your research and plan your strategy.

To day trade, you'll need to examine three primary factors about a stock or asset:

1. Liquidity (how quickly or easily you can execute a trade within the trading day)

2. Volatility (how much the price is likely to change)

3. Trading volume (which can indicate high interest)

The rundown on long-term investments

When you're investing for the long term, you're planning for your future five years to several decades in advance. These are investments that may not see great gains in the initial years, but stand to draw more impressive returns the longer you hold them. 

Examples of long-term investments include real estate, stocks, bonds, and other diversified portfolios. 

Real estate is a tangible long-term investment 

Investing in real estate is a strategy for long-term returns as well as present-day income. Rental property, if well-maintained, should increase in value over many years of ownership. 

Keep in mind that real estate is not a passive asset. It requires time, effort, and money to make it work. You also need significant up-front cash (unlike fractional investing). And there's risk of loss when a unit isn't occupied.

Investing long term in the stock market

You don't need to be a day trader to invest successfully in the stock market. Even the least experienced investors can do well with a robo-advisor plan or small investments through a user-friendly trading app.

A great way to break into investing is to select an index fund such as an S&P 500 fund, which provides partial ownership of 500 companies for instant diversification and modest risk.  

Beware of capital gains taxes in your investments

Be sure to consider how investments will be taxed when you sell them. If you're a US investor, capital gains tax rates vary depending on how long you hold the asset before selling it.

The UAE is a tax haven, making it attractive to many short-term and long-term investors. In the US, non-resident aliens are not required to pay American capital gains taxes but must pay 30% on dividend payouts. Still, it's a really solid position to be in.