Investments

The risks of short term investing

Posted by MoneyController on 03.08.2022

How does one defend an investment against market fluctuations? One of the resources portfolio managers have to limit losses due to market volatility is undoubtedly diversification. But there is also another resource they can count on and that is the duration of the investment. Short-term investments are in fact more susceptible to the risks of market fluctuations than long-term investments.

The bear market affects investments (especially short term)

Those who found themselves investing in recent months with a short time horizon (less than 12-18 months) would probably have had to reckon with perhaps even considerable losses. This bearish market phase has brought contractions in stock indices, in bond sectors, in the indices of some commodities, but also in gold and silver futures contracts. As Mariano Mangia writes in the newspaper 'La Repubblica', among the few positive assets are oil and the Commodity Research Bureau - Index basket of commodities and agricultural goods.

The risks of a short-term strategy

Market downturns can provide opportunities, but in some cases seizing them can be extremely difficult and risky. Mangia reports the opinion of a market expert, Barry Ritholtz, who mentions so-called 'market timing'. The possibility of making money by buying and selling securities in a bear market exists. But, as Ritholtz points out, who has the necessary skills and is really willing to do it? The risks of a short-term strategy seem to be too great. Better to take into account, Ritholtz concludes, that the market is made up of upswings as well as downswings.

Time can reduce exposure to losses

In the field of financial investments, patience is necessary to recover a loss. In this respect, time seems to be an asset that should not be underestimated. Extending investments can be a way to minimise the risk of a loss, as the data from J.P.Morgan's Market Guide, mentioned by Mangia, show.

If we consider a portfolio 50% stocks 50% bonds (both US), the return range of a 20-year investment is 5% to 14% per year. But if we halve the time (10 years), the range goes from 2% to 16%, and if we halve it further (5 years) it goes from 1% to 21%. We then arrive at the borderline case, so to speak, where a one-year investment could lead to a loss or a return of between -15% and +33%.

Read also:

Why does it make sense to diversify your investment?

How are investments divided according to the time horizon?

What do you have to consider for a medium-/long-term investment?

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