Long-term vs short-term investing: What's right for retail investors?
Authored by Rishi Piparaiya, best-selling author and financial mentor
As a retail investor, should you focus on short-term or long-term investing?
The answer, unsurprisingly, is both! You need a short- to medium-term view and a tactical approach to take care of your immediate and medium-term wants. But to create meaningful wealth and achieve financial freedom, you must have a long-term horizon and a disciplined and consistent approach. And it is not one or the other–both approaches are required to have a happy, financially satisfying life.
One of the first steps I advocate, as detailed in my book Three Pigs to Financial Freedom, is to open three separate bank/investment accounts (the three pigs!). The first is a transactional Needs account to cover basics such as food, clothing, rent, utilities, etc. The next is short/medium-term Wants account for the bigger aspirations in life–fancy holidays, education for kids, a car or home, and so on. Finally, everyone should have a long-term Freedom account where one builds a corpus that will one day generate enough passive income, leaving one financially free.
Allocating your income to three distinct accounts requires effort but will bring immense structure and clarity to your financial life. Each account has a different purpose and, therefore, needs to be managed with a different strategy. The Needs account is purely transactional; let us focus on the investment strategies you should adopt for your Wants and Financial freedom.
Short- and Medium-term Investing (Wants)
What would life be if one did not have wants? Possibly aspirational for some but boring for most. You probably have a list of desires you hope to fulfil, and you must start saving and investing for them accordingly. An excellent way to start would be to list them, note when you would like to achieve each of them, estimate the amount needed, and then determine the appropriate financial products. If you need funds in the short term, choose liquid investment options such as fixed deposits and liquid funds.
You could take some equity exposure via balanced funds if your horizon is over a few years. And for wants that will need to be fulfilled in the medium-term, more than seven to ten years, you could take on even more equity exposure through direct equities or mutual funds, basis your risk appetite. This is an active portfolio, and you should monitor it regularly and make course corrections as needed. The fulfilment of your wants will depend on how consistently you invest and how well the portfolio does.
Long-term Investing (Financial Freedom)
You also need to regularly set aside some amount, however small, with the sole objective of achieving financial freedom. This is a one-way street–you will only keep investing and not withdraw unless there is a dire emergency. Given the long-term horizon, equities are one of the best investment options for this account, and based on the risk appetite, retail investors could allocate most of their funds to blue-chip stocks, index funds, and other equity funds. Long-term retirement products such as EPF, PPF, NPS, ULIPs, and Annuities can help diversify the portfolio.
Some percentage of wealth should be kept in assets such as gold, silver, and real estate to provide additional diversification and hedge for inflation. This portfolio does not require frequent monitoring or re-balancing–make suitable, long-term investments and then let time and the power of compounding take its course!
We often tend to over-complicate financial planning. The process is straightforward–split your money into separate accounts, buy simple products basis your time horizon and risk appetite, and be consistent and disciplined. That should set you up well on the journey to meet your needs, fulfil your wants, and achieve financial freedom!
Disclaimer: The opinions expressed above are personal and may not reflect the views of DSIJ.