by Elize Giese


Short-term vs. long-term investing: the pros and cons

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As a business owner, your investment strategy should take into account various factors, one of which is the length of time that you are willing or able to invest for. You also need to consider the pros and cons of each option.

When making a decision to invest, the most important question is: 'What is it for?' This will guide you in terms of the appropriate investment product, return and time period. For short-term goals, such as a new business vehicle, it is better to choose a savings or investment product that carries less risk of losing money and allows quick access to funds. For longer term investments, such as buying new business premises, you would probably require a longer, disciplined approach to saving for the goal.

Here are a few points to consider:

Greater return on your investment

If you invest over the long term, you will enjoy the benefits of your capital increasing over time. You will be able to capitalise your interest (this means that you can add the interest earned to your capital amount) and in the future you will be earning interest on the increased capital amount. If you have the luxury of time, this is an added bonus. Unfortunately, you will lose the ability to access your funds quickly.  A long term investment is typically more stable as you can reap the benefits of improved interest rates and market conditions.

Access to your funds

The ease with which you can access your funds is a primary consideration. If you choose a long term investment and then need your funds, there are often penalty fees which you would need to pay. This is something that is obviously better to avoid. If you think that you may need to use the cash that you are investing, rather choose an account that allows you to access your funds without paying hefty fees.

Capital requirements

When you invest over the short term, time is not on your side. So while your investment will have time to grow, it might not be able to reach its full maturity. In this case, it is better to choose an investment where your capital amount is guaranteed. You will therefore have the certainty that you will not exit the investment with less money than you originally invested.

Long term peace of mind

One of the benefits of having a longer term investment is that you are able to invest and don't have to worry about what to do with the funds. You can invest for the required time period and let your money do the work. With a short term investment, once your time period is up you will need to decide what to do with your money. A nice problem to have perhaps, but another important business decision that you'll have to make.

Most businesses have various funding/saving requirements and therefore it may be beneficial to invest in a range of accounts to meet the full needs of your business. A well structured investment portfolio will provide flexibility and access to your funds via short term products while allowing you to take advantage of the good returns offered on the longer term investment products.

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This edition

Issue 72