Defining Short Term Investments
Short-term investing is an investing style in which the investor focuses most of their activity on buying and selling marketable securities, which means highly liquid securities that can typically be turned into cash within a year. Short-term traders often buy and sell on a monthly basis, while investors utilizing a long-term investment approach would usually buy and hold stock over many years or even decades.
Notably, there is no general consensus on what constitutes a "short-term" timeframe. To day traders who buy and sell over the course of a single trading day at a time and close all of their positions when the market closes, a commitment of a month may seem like a long-term investment, but to many star investors, anything under a decade may be considered short-term. For the purposes of this explanation, we will assume that any investment commitment over a timeframe of more than 12 months is "long-term"; anything shorter than that is "short-term".
How Does the Short-Term Investment Style Work?
Many investors prefer short-term investing since it provides you with regular returns and limits the risk you're exposed to. Buying mainly marketable securities, money-market accounts, high-yield savings accounts, or stocks that are actively traded is low-risk by definition, as you can typically sell them quickly. This gives you two notable benefits:
- If prices drop unexpectedly, you can quickly sell your securities to limit the amount of money you lose.
- If you're faced with unexpected financial obligations in your private life, you can turn your assets into cash quickly.
Short-term investments typically provide smaller returns at a more steady rate than long-term investments. In other words, if you follow a buy-and-hold strategy, putting capital in specific stocks for a decade or more, you may not get exceptionally large dividends every quarter – but in the long run, you'll likely end up with shares in a company that are worth the original investing price many times over. If you prefer the short-term model, you may actively change your portfolio every few months or so, reacting to the fluctuations of the market to make large short-term wins – but you probably won't end up having bought shares in a small startup company and then be able to sell them for an enormous profit once the company becomes the market leader twenty years later.
Short-term vs. long-term: How to decrease risk levels
Both short-term and long-term traders claim that their respective investment style is superior in terms of limiting risk. In truth, they simply follow different approaches for limiting the risks associated with any investment:
- Short-term investments limit risk by investing primarily in highly liquid assets, which means traders can react quickly to sudden price drops. This potentially limits the losses they incur as long as they react quicklShort-Term vs. Long-Term: How to Decrease Risk Levelsy.
- Long-term traders rely on the volatility of an asset "averaging out" over a long period of time. They have the means to ride out the bad times while waiting for the value of their stocks to rise again.
Keep in mind that long-term strategies tend to be affected to a greater degree by changes in interest rates, which can decrease the returns you get from bonds and bond funds in particular. Meanwhile, inflation may require you to adjust the exact amount of money you have in the money market, mutual funds, and many other vehicles.
Short-Term Investing in Stocks
When private citizens consider getting into the investment business to build their wealth or prepare for retirement, the stock market is often the first thing they try out. This is because it's accessible, even to non-accredited investors, and relatively easy to understand. Buy a share of a company to get a piece of the cake in proportion to how well the company is doing. And while stocks may not be entirely risk-free, they are significantly less risky than derivatives, for example.
How to Find Short-Term Investments
In short-term stock investing, timing is key, as you need to find good investment opportunities that will pay off within a short time frame. This is where moving averages come in. This metric describes the average price of a stock over a certain amount of time, and it can be extrapolated to make an assumption about how the stock's price is going to develop within the near future. If averages are going up, this is your opportunity to buy long positions, and if they go down, you can choose to short-sell the stock instead.
When looking for short-term investment options, one thing to keep in mind is that the stock market tends to gain steam from November to April, while the price average remains mostly static between May and October.
Important Short-Term Investment Tools
Short-term trading in the stock market means you buy and sell stocks that are actively traded, so you can conceivably get rid of them quickly if the price plummets. Investors use two tools to do this: sell-stops and buy-stops. Sell-stop orders are standing orders to sell your stock if the price reaches a certain point, while buy-stops are orders to buy stock once it reaches a specified price. These are useful risk-management tools as they allow you to automatically sell stock once it plummets before the value goes too low (and your losses become too great).
A Question of Time – Hands-off or Hands-On?
If you're unhappy with the returns you get from government bonds and your savings account, you might well plan to start short-term investing. But in order to invest successfully with a short-term approach, you will need to be able to set some time aside to actively manage your portfolio. If you're investing long-term with a buy-and-hold strategy, you can probably afford to look at your investments every couple of months only. But in short-term investment strategies, you should be able to react quickly to market changes. One extreme example of this is day trading, which is basically a full-time job in its own right.
But even if you're just trading week-to-week or month-to-month, you'll need to be hands-on with short-term investments. If keeping track of your short-term investments and putting in the necessary research and analysis work to stay ahead of other traders doesn't fit into your schedule, short-term trading might not be the perfect choice for you.
Short-Term Investing in Hedge Funds?
If you qualify as an accredited investor, one interesting alternative to short-term investing in the stock market manually is hedge fund investing. The advantages here are that hedge funds are able to invest your money into a variety of investment vehicles (leading to potentially more significant returns) and that they can use hedging strategies to minimize any risk involved with the investment.
On the more practical side of things, hedge funds do their own research on where they put your money. This means as long as you have reason to believe that the hedge fund in question has the talent to make sound investment decisions, you're pretty much set.
However, there is one downside: lock-up periods. Since hedge funds can invest in a variety of securities, they may also invest money into illiquid assets. This is why many hedge funds have lock-up periods of six months or more. Once you withdraw your money from a hedge fund, it might take six months or more until you actually get your money back, as the management team needs this time to withdraw your money from illiquid assets.
CARL's Quants Are Ideal for Short-Term Hedge Fund Investing
Here's the good news: If you're an accredited investor, CARL can give you access to sophisticated quantitative hedge funds with no lock-up period. This means you can withdraw your money from our hedge funds on a monthly basis, making them a perfect vehicle for short-term investments, as you can withdraw from our quants if you need to turn your investments into cash unexpectedly. Add to that 15%+ targeted returns and the full power of the quantitative approach, and you've got yourself a unique alternative short-term investment option for your portfolio. Check out our quants and set up your CARL account today.