Short-term vs long-term investing

What is long-term investing?

A long-term investment is one intended to be held for a significant amount of time - at least five years, but typically ten or more. The approach is based on the principle of spending time in the market, rather than timing the market.

The goal is a higher return due to the length of time the investment is held and the associated compound growth. Compound growth is the return upon the returns you put back into your investment.

Perhaps the most recognised long-term investment is a personal pension scheme. Here, you commit your money to the fund, or a selection of funds, and are unable to access it until you reach a certain age, whether you contribute regularly or not.

Some investors taking the long-term route choose to place their money in higher-risk options. This is because there's not only the possibility of better growth over the course of time, but also the potential to recover any losses.

Bear in mind all investments can go down as well as up, and you may get back less than you put in.

The benefits of long-term investing

Some of the benefits associated with long-term investing include:

The potential for growth over time

One of the benefits of long-term investing is the potential for market growth. Stock markets may fluctuate daily during particularly volatile periods, but if you look at the wider picture, the trend has been for stock markets to rise over time. Of course, past performance isn't a reliable guide to future performance, but holding an investment for the long haul could increase the potential for a higher return, helped along the way by the compound growth.

Compound growth is the return earned not only on your initial investment, but also on the returns you receive during its lifetime and reinvest back into it.

If you're only investing for the short term, you won't see the full potential gains of compound growth.

Pound cost averaging

Pound cost averaging is a term referring to the potential benefits of regular investments over that of a single lump sum. It works on the basis that steady investments, in a fund for instance, can help reduce the effects of market downturn that investing a lump sum might expose you to.

This 'drip-feed' approach means you continually invest regardless of whether the markets rise or fall. This allows you to buy more assets (or units in a fund) when prices are low and fewer when they're high.

As a simple example, you could invest £3,000 as a lump sum or invest it monthly over the course of five years at £50 a time. The lump sum buys a set amount of units/assets at their current price in one fell swoop. Meanwhile, a regular investment can potentially benefit from price fluctuations over the course of 5 years. This means when the markets are down your £50 will buy more units/assets than when they're soaring high. The cost of investing can potentially average out over time, so the average cost per unit/asset is less than if you'd bought them with a single lump sum.

Potentially less risk

Although there's no such thing as a risk-free investment, long-term investing has the potential to be less hazard-prone than a short-term approach. A longer timespan gives your money the opportunity to ride out any storms that might blow through the markets, driving off course those who had their heads turned by short-term gain. The nature of stock markets means that once the storm clouds have passed, the tendency is for blue skies to return.

With a short-term outlook, there is often the temptation to pull money out at the first sign of trouble, taking the hit, but not taking the time to recover. A long-term outlook offers the potential for a calmer experience and a stronger investment return.

What is short-term investing?

Short-term investing is placing your money with a financial product or market, with the intention of achieving a return in a shorter space of time.

Taken to its extreme, short-term investing includes day trading, where stocks are bought and sold within the space of a day – sometimes within seconds – in order to take advantage of short-term price fluctuations. But short-term investing could also mean withdrawing from an investment plan before the recommended time.

Pulling out of an investment scheme after seeing a profit may be tempting. Doing so, however, would mean missing out on the chance the market would rise further over the course of the recommended duration, along with any compound growth that may accumulate during this time.

Long-term vs short-term investment, at a glance

Final thoughts on long-term investing vs short-term

Both approaches have their potential benefits, but long-term investing potentially provides an increased chance of a higher return through compound growth and the recovery of losses over time. To repeat the age-old adage that has often proven insightful over the years: It's not about timing the market, but about time in the market.

Bear in mind all investments can go down as well as up, and you may get back less than you put in.