How to Balance Between Short Term Returns and Long Term Returns?

How to Balance Between Short Term Returns and Long Term Returns?

Last Updated: Dec 16, 2022 - 04:18 pm 141.7k Views
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The common refrain about investing is that it is a long process hence you must not focus too much on short term returns. But, as Keynes said, in the long run we are all dead and therefore you need to look at short term returns too. Not all goals are long term goals and there are some short term goals too. Hence any investment decision has to be a mix of short term and long term investment returns. Under normal circumstances, there are no tactics required to make a substantial amount of money. It’s a long term process and often requires commitment and patience during market fluctuations. But an important decision is about crafting the fine balance between long term and short term outcomes of your investment.

When to balance: when goals are varied

Typically, most of us have a variety of goals to cater to. Some maybe short terms goals like planning for a car loan margin or a home loan margin. Some goals could be medium term goals like creating a nest egg, buying a second property etc. Then there are long term goals like retirement planning, planning for your child’s college, creating an estate etc. Your investment choice and investment return expectations must be based on the tenure of goals. For short term goals ranging from 3 to 5 years you must prefer liquid or bond funds with limited credit risk. Returns will be low but so will be risk; and the investment will be liquid. For medium term goals, focus must be on G-Sec funds, MIPs and balanced funds. For long term goals, you can look at a mix of diversified equity funds, index funds and multi cap funds since equity gives the best risk-adjusted returns over a longer time frame.

When to balance: when undertone of the market is changing

This is slightly more discretionary in nature. With some detailed research, you can decide to increase the equity exposure when the markets are undervalued compared to historical averages. On the other hand, if the P/E is well above the historical band and the bond yields are moving down, it is time for you to go overweight on debt. Moreover, if you are getting into volatile market conditions, you must look to increase your allocation to gold. Each of these decisions has unique risk and return implications.

How to balance: short term and long term options available

Most of us have heard of short term investments and long term investments, but would not be sure of what they mean.  What is the difference between them and what investment strategy is best for you? Short term returns arise from short term investments while long term returns originate from long term investments. Even in case of long term investments like equities, your strategy can be short term trading returns, medium term strategic returns or even long term wealth creation.

Let us understand the long term and short term terminologies. A long term investment is an investment that can be held for a longer period of time. Normally, long term investment is for a period of more than 8 years. On the other hand, a short term investment is an investment that is held for a period of 2-4 years. Investments between 4-8 years are normally classified as medium term investments. Short term investments include certificates of deposit, money market funds, and short term bonds. Numerous people try to play the market or take risks with intraday trading or even with futures and options trading. But it is advisable that one should do appropriate research before going for short term online share trading. Long term investments are safer and suitable for beginners.

Achieving balance is all about paybacks

When it comes to investing, it is essential to discover the right balance based on your individual condition. Before investing, whether it is for long term or short term, set clear objectives in mind. Even though you are interested in short term investments, it is advisable to set aside a share of your money for long term investments. This will safeguard your investments if in case you happen to lose money due to an unexpected market reaction or bad investment selection. Investing is a significant money making tool and not something to sidestep or be scared of, so do it with patience and careful research.

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