Time is a determining variable in any investment process. Little has to do with the approach of an investment over a period of a few years with that relating, for example, to retirement planning, which can extend up to four decades. The needs in terms of profitability expectations assumed risk or liquidity of the investment will be notable.
Without having a single criterion, we can distinguish three types of investments according to the time horizon considered:
- Short-term investments: those that last approximately one year are classified as short-term investments.
- Medium-term investments: investments made within a period of between one and five years fall into this category.
- Long-term investments: those whose term exceeds five years.
Short-term financial investments
In this type of investment, two criteria generally prevail security and liquidity.
Security because we do not have a temporary margin to deal with unforeseen events. You must avoid investments with high volatility that put at risk the capital invested, such as investment in the stock market. This is suitable for long-term investments, in which volatility is diluted over time and the profitability obtained is usually much higher than that offered by more conservative assets, but it is not advisable in shorter terms.
Liquidity is the property of financial products and savings, which defines the ease and speed to turn them into money. The more liquid a product is, the easier it is to undo it and recover the money. In short-term investments, it is essential to have that quality.
Where to invest in the short term
Some of the vehicles that can channel the investment in the short term under the premises described above are:
- Deposits or remunerated accounts: Profitability is fixed in advance. It will be smaller in low-interest rate environments, but we will enjoy high liquidity and security.
- Treasury bills: can be purchased from a nominal amount of € 1,000. They are short-term fixed-income securities represented exclusively through book entries and are issued in the following terms: 3 months, 6 months, 9 months and 12 months. If you want to undo the positions ahead of time in the secondary market, the variations of its price are usually quite small. They are therefore very low-risk assets.
- Conservative investment funds: investment funds enjoy great liquidity since they are usually paid into account within a period of between one and three days from the sales order. To avoid incurring risks in a short term, the most suitable funds are those that invest in short-term fixed-income assets, with reduced volatility.
Where not to invest in the short term
Stock market: the behavior of the stock market in the short term is difficult to foresee. Yes, it is highly liquid assets, but in which we would incur high risks not only in terms of the profitability objective we have but also in terms of maintaining the capital of the investment.
Long or very long-term fixed income securities: given that the objective will not be to hold them until maturity and we will have to negotiate them in the secondary market, it is important to bear in mind that the volatility of the price of long-term fixed-income securities is Higher
Investment funds that invest in risky assets: yes we will enjoy the high liquidity of these products, but we will be subject to the volatility of the assets in which they invest.