By Vincent R. Birardi, CFP®, AIF®, Wealth Advisor at Halbert Hargrove
We’ve heard this question a lot from our clients over the years. Which is better? The short answer is….it depends. Before we delve deeper, we should define “short-term” and “long-term” investing. And before we do that, it’s important to differentiate investing from saving.
What it Means to Invest vs. Save
Investing involves assembling and implementing a goal-oriented action plan that includes purchasing assets such as marketable securities. These are financial instruments that can be easily bought and sold on a public market, such as stocks, bonds, and mutual funds.
In comparison, saving is the building up of cash or cash-like reserves to fund a near-term expense.
In terms of the time elapsed from when you begin to when you need access to your funds, here’s a framework to help sort these two concepts out.
What is Saving?
0-2 years: Saving
Short-term investing can be accomplished by utilizing a taxable brokerage account.
What is Long-Term Investing?
10+ years: Long-Term Investing
This can involve investing for longer-term objectives such as your retirement. Two ways to save for retirement are through an employer-sponsored retirement plan (e.g., 401k or 403b) and an IRA (Individual Retirement Account).
When to Purchase Marketable Securities
To say this directly, you should not purchase and hold marketable securities for money you need within the next two years. Two critical reasons for this are:
- Investment returns of marketable securities within any rolling 2-year period are typically volatile and unpredictable.
- Capital gains derived from marketable securities purchased and sold within a 12-month period are taxed at the seller’s marginal federal tax rate, which can be as high as 37%. By comparison, long-term capital gain rates are either 15% or 20%.
Using Short-Term and Long-Term Investing Together
Deciding whether to engage in short-term or long-term investing isn’t a zero-sum proposition. You most likely can and should do both. The simple reality is that most people juggle multiple goals with multiple timelines. These can range from 2-10 years – like funding college for your 8th grader – to long-term goals for retirement, which could be 30 or 40 years out.
Here are a few things to remember:
- Your returns will compound – earning returns on both your original investment and on the returns you received previously – the longer you remain invested.
- If you’re unsure when to begin investing, an old adage sums this up nicely: “It’s not about timing the market, it’s time (spent invested) in the market.”
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Disclosure:
Halbert Hargrove Global Advisors, LLC (“HH”) is an SEC registered investment adviser located in Long Beach, California. Registration does not imply a certain level of skill or training. Additional information about HH, including our registration status, fees, and services can be found at www.halberthargrove.com. This blog is provided for informational purposes only and should not be construed as personalized investment advice. It should not be construed as a solicitation to offer personal securities transactions or provide personalized investment advice. The information provided does not constitute any legal, tax or accounting advice. We recommend that you seek the advice of a qualified attorney and accountant.
The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without previous notice. There is no guarantee any forward-looking statement will come to pass. All opinions or views reflect the judgment of the author as of the publication date and are subject to change without notice. All information presented herein is considered to be accurate at the time of writing, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. This material should not be relied upon by you in evaluating the merits of investing in any securities or products mentioned herein. In addition, the Investor should make an independent assessment of the legal, regulatory, tax, credit, and accounting and determine, together with their own professional advisers if any of the investments mentioned herein are suitable to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yield may not be a reliable guide to future performance. Any reference to a market index is included for illustrative purposes only as it is not possible to directly invest in an index.
