How to Invest for Short-Term and Long-Term Goals

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Typically, short-term investments involve less risk than long-term investments, which give your money more time to grow and to recover from dips in the market. Having clear financial goals can help you decide whether to choose short- or long-term investments, and which vehicles within those categories make the most sense for you.

Without a concrete idea for what to do with your money, you could choose investments that are too risky, leading you to lose money allocated for financial goals such as a down payment. Or, you could fall short of your goals if you play it too safe and miss out on growth for things like retirement savings.

Here are the primary differences between short- and long-term investments and how to match them to your personal and financial goals.

Short-Term Investments vs. Long-Term Investments

When you invest for the short term, you'll need access to your money sooner, which means it's best to choose less risky investments. Conversely, when investing for the long term, your money has more time to recover from losses and to take advantage of growth in the stock market. That makes it more practical to pursue options that carry some risk.

Below are some of the key features of short-term and long-term investments.

Short-Term Investments vs. Long-Term Investments
Short-Term InvestmentsLong-Term Investments
More liquidity, meaning you can access your money more quickly and easilyLess liquidity, meaning there may be obstacles to withdrawing your money
Less volatility, meaning the value of your investments is more likely to stay stable over timeMore volatility, meaning the value of your investments can change substantially according to economic conditions and other factors
Easier to manage on your own without the help of a financial professionalMore likely to require active management or oversight by a financial professional
May have more flexible withdrawal optionsMay limit your options for penalty-free withdrawal (for example, retirement accounts that require you to hit a certain age before you can withdraw funds without a penalty)

What Is a Short-Term Investment?

Making a short-term investment generally means you plan to access the money in three years or less. Ideally, the investment method you choose should shield your money from losing value in such a short time. That typically means there's a trade-off: Your money will be safer, but you won't see as much growth as a riskier investment vehicle might provide.

Examples of short-term investments include anything highly liquid—in other words, investments you can cash in easily. That can include traditional or high-yield savings accounts, U.S. Treasury bills (not to be confused with longer-maturity Treasury bonds), money market accounts and short-term certificates of deposit (CDs). Bonds can also come with maturity dates of one to three years.

Especially in a low interest rate environment, your potential returns on a short-term investment may only serve to minimize losses due to inflation. As of early 2022, for example, interest rates on three-year CDs rarely topped 1.10%. But that's still better than keeping your money stashed in cash at home or in a savings account that pays an average 0.06% interest, according to the Federal Deposit Insurance Corporation (FDIC), for example.

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What Is a Long-Term Investment?

A long-term investing plan can involve higher-risk choices because your money has more time to bounce back after incurring losses. In most cases, making a long-term investment means you don't plan to access the money for 10 years or more. Saving in a retirement account such as an IRA or 401(k) is a way of investing for the long term.

Some types of long-term investments include stocks, longer-maturity bonds and mutual funds—or a group of investments, including stocks and bonds, overseen by a fund manager. Exchange-traded funds (ETFs) are another type of investment that includes groups of stocks or bonds, but that can be traded more often than mutual funds. Real estate investment trusts (REITs) are also long-term investment options that allow investors to put their money toward real estate projects likely to produce returns. You'll buy shares in a REIT just as a stock gives you a share in a company.

The average consumer can protect themselves against some of the ups and downs of long-term investing by regularly contributing to a retirement or brokerage account, no matter the current state of the market. That's a strategy called dollar cost averaging, and it means that you'll have the opportunity to buy more stocks when they're priced lower and less when they're more expensive. In practice, this simply means setting up regular contributions—perhaps monthly or every time you get a paycheck—and leaving your money alone instead of trying to time the market.

Short-Term vs. Long-Term Investing: Which Should You Choose?

It's wise to have both short- and long-term investments that are matched to your goals. Setting aside money in a money market account or a CD is a good idea if you plan to use the money for a honeymoon in a year or two. An emergency fund, which should be accessible immediately, is better off in a high-yield or traditional savings account you can easily withdraw from.

Simultaneously, you may allocate other types of funds for long-term plans. Perhaps you save in a retirement account like a 401(k), and separately in a brokerage account because you plan to buy a house in 10 to 15 years. Choosing both short- and long-term investments makes sense as you set goals and priorities, as long as you also maintain a solid foundation of emergency savings.