Short-term investments are those that are expected to be maintained to obtain returns in a period of around twelve months or less.
That is, short-term investments are those that are planned for times of approximately one year.
It is worth clarifying that, although the annual period is what is usually accepted when talking about the short term, this is not an absolute rule.
When we refer to a short-term horizon, this may vary according to the investor’s profile. For some agents, a short-term period could be three years, taking into account that most of their investments are being planned to hold five years or more.
However, for an investor who is used to trading in the financial market on a daily basis (Day Trader), speculating on the stock market, the short term could be a week or less.
In any case, the short term does not have an absolute definition. However, it is normally related to annual periods.
Another point to take into account is that investors usually include assets of different types in their portfolio, both short and medium and long term.
A key factor is the investor’s objectives. If you are primarily looking to protect your capital because you are close to retirement age, for example, you will prefer short-term investments. On the other hand, if you are starting your working life, you are probably more interested in long-term investments which, as we will see later, offer higher returns over longer periods.
Characteristics of short-term investments
Some characteristics of short-term investments are the following:
- They tend to be safer (or have less volatility) than long-term investments.
- They offer lower returns than long-term investments. This is verified in extended periods, of several years.
- They are investments with greater liquidity. This means that they can be converted to cash relatively easily. In other words, the investor is expected to be able to recover his money in an agile way.
- For all the above, they are suitable investments for people with high aversion to risk.
Examples of short-term investments
Some examples of short-term investments are:
- Treasure letters: They are public debt securities issued for a period of three to eighteen months. The buyer receives a profit based on a fixed interest rate. They are letters issued at a discount. That is, if the nominal value of each letter is, for example, 1,000 euros, the asset is acquired below that nominal, for example, 980 euros. At the end of the investment, the difference between the acquisition price and the value of the letter (1,000-980 = 20 euros) is the investor’s profit.
- Conservative profile investment funds: There are investment funds that invest mainly in fixed income. They offer a relatively low return (compared to mutual funds that buy more equities), but with little volatility.
- Securities note: It is a short-term debt instrument that a private company issues in the financial market. They are usually issued at a discount (as we explained in the case of Treasury bills), paying the nominal value to the investor at maturity.