Which is best investment for short term?

Is there ever a need to invest for a short time period? We speak with Chief Analyst from Wealth Within, Dale Gillham about why people may invest for the short-term and the options available to do so. 

Just over a decade ago, Apple launched the iPhone, which allowed users to access the internet from anywhere, anytime. The desire for information at the touch of a button has exploded, satisfying the need to have whatever we want now with instant gratification filtering into how we invest.

In fact, the growth in technology together with the GFC, Bitcoin bubble and now the Coronavirus crash has created a generation of individuals seeking short-term gains, as they fear holding onto investments over the longer term in the event they may lose. So is short-term investing a good idea and what are the options if you decide to invest over the short-term?

What is the main reason you are investing?

Before I answer this, let’s look at investing in general terms. Most would acknowledge that investing means to acquire assets to obtain capital gains and/or income. But when looking to invest, there are two essential components you need to consider, which includes the risk you are taking and the timeframe you are investing over. Both of these elements will determine where you invest and what you invest in. The more capital gains you desire, the more volatile and the higher risk, while typically the lower the risk, the lower the income and volatility.

The concept of risk and reward is important to understand, as more individuals are beginning to favour investing over the short term, despite not understanding the risks they are taking. In fact, many of these same individuals want certainty with their investments regardless of the timeframe, which is something that is very hard to come by.

What options are available for short-term investors?

So, if you are looking to invest in the short term, what options do you have and what reasons would you consider short-term investments? Ultimately, this will depend on whether your tolerance to risk is low, medium or high. But the obvious choice is the stock market, as you can invest in a myriad of options from low-risk blue-chip stocks or ETFs, to higher risk micro-cap or speculative stocks.

Higher risk options include, derivatives and leveraged products such as options, Forex and Contracts for Difference. The leveraged nature of these products means they are more volatile and present far greater risk for investors but they can all be used for short-term capital gain while some may deliver income, provided you know and understand what you are doing.

Other short-term investment options include commodities, such as Gold and Silver, as well as collectibles that can generate a good short-term return if purchased at the right time. While property is not normally considered a short-term investment, residential property can be bought and sold for a short-term profit if done well.

Related article: How to buy and invest in Gold in Australia

Why would you consider short-term investments

In my experience, there are only a few situations where someone might benefit from short-term investing. The first is to generate an income to live on, which many traders aspire to do. This may also be required for those who are nearing retirement and need more income to live comfortably.

The second reason is that you need money for something in the short term as locking your money away in a longer-term investment doesn’t suit you. There are also those who just like the challenge of short-term investments, which is fine provided you don’t put all your eggs in the short-term basket.

Before I finish, let me say that while I support short-term investing, I would normally advise that you do this as part of your overall strategy for building long-term wealth, which is different to long-term investing. The difference is the ability to compound your returns because you can reinvest your profits, which means you can reap far better rewards then a long-term buy and hold strategy. Given this, I would recommend a medium to long-term view of investing, while using short-term investing to supplement your current income. This provides a good balance between risk and reward.

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