An investment horizon plays a key role when choosing the right products or assets for your investment. Sometimes you need to have money immediately, sometimes in a few months or years and sometimes in 10 or 30 years. In this article, we discuss what a short-term investment is in comparison to medium and long-term investment and how to receive the desired returns in a given time horizon.
Short-term vs. medium-term vs. long-term investment
We have defined an investment in this article. Now the question is what is the short, medium and long-term investment. Let´s think about the investment horizon and define our short, medium and long-term investment.
Surveys say that Czechs keep earned money largely on a normal or savings account without investing them. Therefore, for a short-term investment, we are looking for investments that can be better than savings account revenue and provide a similar “risk-free” approach. Such short-term investment starts from 3 months (term deposits, money market products). So, let´s set a time horizon for short-term investments – 3 months to 2 years. In the medium-term investments, we can mark investments with a horizon of 2-6 years, I chose 6 years based on the period of popular building savings, which is now coming back. Long-term investments then mark investments with a horizon of at least 7 years, based on your time horizon that you set in your financial plan.
Where and for how long you save money should be decided based on your goals. The way of investment will differentiate if you need more short-term oriented investments, such as buying a car or renovating an apartment, or you invest long-term for retirement or as an investment for your kids.
Common enemy – inflation
The enemy of any short, medium or long-term investment is inflation (growth in the price level of goods and services). Inflation eats the purchasing power of our money. There is rarely a time when we experience deflation, or a period when prices of goods and services are falling.
That is why we have to choose products that can compete with inflation. Unfortunately, short-term investments do not provide much choice, inflation is usually not covered. In the long run, we find products that can beat it up without difficulty and still provide a solid return.
What are short-term investments
These are investments with a short horizon of several months to a few years. You plan to use the money for a particular thing soon, for example, creating a reserve fund for unexpected spending. They include, for example:
- Term Deposits – an alternative to Savings Accounts. Term deposits have a higher return and a similar risk. However, they do not have such liquidity. You can pay a fee for early withdrawal. You can choose the investment horizon from 3 months to several years.
- Treasury bills – these are short-term government securities issued with a maturity between 3 months and 1 year. They are very safe and therefore their yield is also low, sometimes we are talking about risk-free bills. However, for an investment you need an account with the Czech National Bank and a larger amount for the investment – several million Czech crowns. For this reason, predominantly larger companies or institutions invest in treasury bills. A regular person can invest in them through funds but beware of fees!
- State short-term bonds – with a horizon of 1 year and above. Secure investment. Favorable when interest rates on term deposits and savings accounts are turning and declining. But this is not the case today, the Czech National Bank rates are now increasing.
- Money market funds – it is a possibility to invest in the money market as a small investor in the short term. You have no appreciation guaranteed, it also depends on the movement of interest rates.
Overview of interest rates on selected term deposits in Czech Republic as of 20.7.2018:
What are medium-term investments:
Investment with a medium-term horizon of 2-6 years. You know that you will need the money in a few years. It is also possible to choose products that correspond to this horizon:
- Mutual Funds – Stock, Bond or Mixed. The offer is diverse and the popularity of mutual funds in the Czech Republic is growing. However, they have higher fees than ETF funds, but they are mostly secured in CZK. For a medium-term horizon, I would not choose 100% stocks, but rather mixed, ie a combination of stocks and bonds.Bonds – government, corporate or riskier high yield bonds.
- Bonds – government, corporate or riskier high yield bonds.
- Building savings – a very popular way of saving in the past. Now again on a slight rise. The minimum length is newly 6 years, you are waiting for state contributions, but the yields are now smaller, just over 1%.
- P2P Loans – You know the advertising claim: people lend to people. Such companies growing on the Czech market. I will mention here Bondster, who also offers loans that are secured by real estate.
What are long-term investments
Investments with longer term horizons – 7 years or more. On retirement, for children to study and other longer-term goals. You can reach the following investments:
- Education – quality education and investment in human capital is the basic. It will develop your personality and, in the long run, will bring benefits that cannot be paid by money. I do not mean just state schools, but above all education outside this system that will open up new horizons. It can be through courses, seminars, books, and so on.
- Shares – In the short run, stocks are risky. In the long run, it is risky not to have stocks. It is a traditional asset for long-term investments that brings higher yields and higher fluctuations. You can invest in stock indices, for example through ETF funds, where the investor passively duplicates the market and diversifies widely.
- Bonds – bond fund, specific bonds or ETF funds and other options.
- Precious metals – such as silver, gold. Either through ETF funds or physical metals. For physical metals, the spread is slightly higher (spread = difference between buying and selling price), so it is necessary to expect a longer time horizon to overcome the spread at all. The investment horizon for metals should be 15 years or more, ideal for saving for children or for people under 40 for retirement and to cover inflation.
- Real estate – investment property has recently been a big hit not only due to low interest rates. At present, however, I would be cautious about buying real estate because it is very expensive, and we are in a phase of strong economic growth. Real estate is worth buying especially when the economy falls and their prices are falling. This is an opportunity to create long-term passive income for several generations. It includes agricultural land, building land, flats, houses or garages. The Rentiero project has also appeared on the Czech market, which makes it possible to invest in real estate from a small amount, an alternative would be the REIT fund.
- Alternative investments – wine, whiskey, veterans, carpets and everything else that comes to mind.
- Supplementary Pension Savings – If you are about 10 years old before retirement, supplementary pension savings is a very good way to make money. In the longer term, for example, passive copying of the index (calculated with revenues of 9% per annum) is paid off.
- Own business – If you have a business idea, you can start up a startup and start your own business, but with all possible risks.
Overview of the returns of individual asset classes in the long run:
Source: Jeremy Siegel, Stock for the Long run
Advantages and disadvantages of short-term vs. medium-term vs. long-term investments
For each goal of the financial plan, you should choose a suitable way of investing to cover inflation and ensure at least some return. It is also important to look at the amount of fees. In the shorter horizon, your earnings might be subject to the tax (15% from interest rates and investment returns and dividends), which in the long run, for example, for shares, ETFs or mutual funds and other products is not the case (3 years or more, or a total income (total volumes) up to CZK 100,000 per year).
An investor is also its own enemy in the long run, as he may not emotionally stand short-term market drops, and he will rather take a loss than overcome hard times. We need to count with it when buying stocks and more volatile products. Rewards are then higher yields. Here you can also read what character an investor should have.
When investing, it’s important to realize what we expect and for how long we plan to invest.
The expected yield, the risk and the investment horizon come into the game. If you need money within 3 months, it makes no sense to practically try to invest, the savings account will make its work, even “without risk”.
If you have a short-term investment horizon, you can choose from term accounts or money market investments or short-term bonds, such as a particular high-quality company.
In the medium term, other investment opportunities, such as popular building savings, medium-term bonds or even stock, are coming into play.
If you invest in the long term, such as for retirement, children, or other things, you can afford to fully invest in stocks with higher volatility and expected returns. From a long-term point of view, the problem of recessions and crises that provide opportunities for “cheap” investment is not a problem.
Invest reasonably, not with emotion.
And what do you prefer? Short-term, medium-term or long-term investment? Share with us and other readers your point of view in the comments below.
Ps: This is not an investment recommendation or advice, only a personal opinion of the author.