For any investors who just enter stock market, a debate whether to choose long term or short term investment is almost certain. There’s a lot of advice out there when it comes to investing long-term and a lot of tools and resources to help you understand the definitions. In this blog, I want to bring a simple factor front and center: the reason you invest is to maximize your return. So understanding the impacts to your return between long-term and short-term investment is the most important factor.
Long-term investments are those vehicles that you intend to hold for more than one year. On the other hand, you usually hold short-term investments for one year or less.
1.Tax consideration: Probably the most distinguished factor that impacts your bottom line returns.
Short term capital gain does not benefit from any tax rate benefit. It is taxed as your regular income with tax rate 10-40%. For long term capital gain, more than likely you will enjoy a reduced tax rate, which is 0, 15 or 20 percent for most investors. It is possible you can avoid paying any tax if your regular income rate is less than 15 percent. Even if you fall into higher tax rate in regular income tax, you still can save 20 percent tax rate. This makes significant difference on your captain gain.
To enjoy the most tax benefit, you will also need to understand your normal income tax rate. If you anticipate your tax rate to be very low for the year, it might be the time to sell some of your long term investment, if you have maximized your expected gain.
All stock investments carry some risks. In general, the higher expected risk, the higher expected return. When you are young, you have ability to carry higher risks. Short term and long term investments face different risks as well. The biggest risks for long term investment should be volatility. Since you intend to carry your investment vehicle for longer period of time, your investment will go through more volatility and fluctuations over time. On the other hand, short term investment might not general the best return through missing company earnings that can only be generated by long term strategic initiatives.
3. Time involved
I personally think long or short term investments require very different level attention to your investment vehicles. Many times we heard people say that they only invest long term. The underlying message was not just because they believe long term investment is better, rather it is because they don’t have time or desire to pay closer attention to the investments. I believe that if you want to truly build your wealth, get closer to the stocks you invest and more interested in the company strategies as well as industry movements are necessary steps. At the end of the day, maximize your return takes understanding and knowledge of investment. In this sense, time invested into it is a must.
As an investor, you’ll probably need a mix of long-term and short-term vehicles. By knowing the differences between these two categories, you should have a good idea of what to expect from your investments — and this knowledge can help you make those choices that are right for you.
Simple Wealth For Women is a blogging website focusing on financial discussions. I help women to crush debt, learn how to invest and make more money. I show you simple approach and provide you with specific ideas to help you get to financial freedom and build an amazing life.