Topic: Growth Stocks

The best (seemingly) short-term investments still don’t provide the benefits of a long-term strategy

What looks like the best short-term investments won’t give you the same results as a good long-term investing strategy.

When you start investing, you may think the secret to investment profit and finding the best stock picks is to “buy low, sell high.” But that’s hard to do. You’ll often buy just before prices fall, or sell just before they further rise.

In fact, what looks like the best short-term investments won’t give you the same results as a good long-term investing strategy.


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The (seemingly) best short-term investments and market volatility

One thing to consider about short-term investing is the market’s volatility. When volatility is heightened, it makes it harder for in-and-out traders to make money.

There is no denying the immediate appeal of taking a fast profit. However, most successful investors find over long periods that much of their profit comes from a handful of their best investments—stocks that went up much more than they ever expected. If you are too quick to take profits, you’ll wind up selling your best picks when they are just beginning to rise.

The best short-term investments include short-term bond ETFs

A short-term bond fund is a mutual fund or exchange traded fund (ETF) holding bonds with maturities between one and three years. Short-term bond funds can invest their assets in government or corporate bonds. As a general rule, the safest bonds are issued by or guaranteed by the federal government. Next come provincial issues or bonds with provincial guarantees.

Short-term bond funds face a lower risk from interest-rate increases (changing interest rates influence the value of existing bonds inversely).

In general, short-term bond ETFs charge considerably lower MERs than bond mutual funds. That’s why, if you want to find and hold the best bond funds, we recommend taking the low-MER approach offered by a bond ETF.

Your broker may have a vested interest in recommending the “best short-term investments” for you

Investors may try to improve their returns by taking money out of the stock market when they feel risk is high. They often get this urge after a few weeks or months of bad financial news or unsettling public health or political developments.

By then, however, the market may have already dropped far enough to offset any negative developments. Often, these temporary sellers wind up buying their way back into the market when the news has improved and stock prices have gone well above the price where they sold.

All too often, brokers encourage this short-term investing strategy. They may advise clients to “take some money off the table,” setting up a false analogy between investing and gambling. That’s in a broker’s interest, but not yours.

Every sale generates a commission, which goes to the broker. It also gives the broker the opportunity to sell the client something new and make another commission.

The investor may re-invest in a product that’s more profitable for the broker—selling the proceeds of a stock sale to buy an annuity or a universal life insurance policy, say. However, investors at discount brokers also manage to sell low and buy back high, without any broker encouragement.

Even the best short-term investments miss out on compounding

Compound interest—earning interest on interest—can have an enormous ballooning effect on the value of an investment over the long term, and lift the overall returns on your portfolio.

This applies to equity investments like stocks, as well as to fixed-return, interest-paying investments like bonds. When you earn a return on past returns (including dividends), the value of your investment can multiply. Instead of rising at a steady rate, the number of dollars in your portfolio will grow at an accelerating rate.

You need to pay attention to steady drains on the capital in your portfolio, even seemingly small ones—like high brokerage commissions. Additionally, you can’t expect to earn an outsized return on an investment in your portfolio indefinitely. If you did, you’d wind up with a measurable fraction of all the money in the world, and nobody ever does that. Instead, focus on making steady gains over time.

The right best short-term investments for your investing life

You need to use a short-term investing strategy and a stock strategy that suits both your goals and your temperament. For you, that may mean holding six months’ worth of income in a money market fund.

To succeed as an investor, you need to get used to the idea that short-term declines come along unpredictably. These declines are common enough that investors continually think about them. But they are far less common than the predictions that the next one is right around the corner.

Do you look for the best short-term investments? If so, do you look for short-investments while still following a long-term investment strategy? Have you ever benefitted financially from buying short-term investments and selling them quickly? Please share your experience with us in the comments.

Comments

  • I invest both ways. Half of my investment money is allocated to index funds: S&P 500, TSX comp index, a European index and a bond index. The other investment portion is allocated in stock picking. Proceedes from gains on my stock picks or added to my index funds. I attempt to choose stocks with growth potential or value potential. For example, one stock I own now is SHOP and another I purchased last year on a 20% slump was TRP.

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