Financial goals exist on a timeline. Some, like buying a new car, might be reached within a year. Others, like retirement, may be decades away. Fortunately, short-term and long-term investments may help you achieve these different goals.
Read on to learn about long-term and short-term investments and the important considerations that come with each. Knowing the difference between long- and short-term investments can help you build a portfolio that aligns with your wants and needs.
Table of Contents
- What Is a Long-term Investment?
- What Is a Short-Term Investment?
- The Differences Between Long-Term and Short-Term Investments
- The Similarities Between Long-Term and Short-Term Investments
- What About Day Trading?
- Long-Term Investing and Compounding Returns
- Tax Differences Between Long- and Short-term Investments
- Finding the Right Approach
- Holding Short-Term vs Long-Term Investments
- Deciding Between Short-Term vs Long-Term Investments
- FAQ
Key Points
• Long-term investments are assets held for more than a year and generally more than five years — often used for goals like retirement or a child’s education.
• Short-term investments are held for less than a year and are used for more immediate financial goals, such as saving for a down payment on a car or vacation.
• Long-term investments may weather market dips over time , while short-term investments are typically higher risk.
• Tax treatment differs between long-term and short-term investments, with long-term capital gains taxed at 0%, 15%, or 20%, and short-term gains taxed as regular income.
• Depending on an investor’s goals, timeline, and risk tolerance, a diversified portfolio may include a mix of both short-term and long-term investments.
What Is a Long-term Investment?
A long-term investment is generally an asset or security expected to generate income or appreciate in value over a prolonged period, typically five years or more. However, for tax purposes, the Internal Revenue Service (IRS) considers long-term investments to be investments held for more than a year.
Brian Walsh, a CFP® at SoFi explains that long-term may be defined a little differently when you’re thinking about saving. “A long-term goal is really going to be anything that’s more than seven years out. So a lot of times, we think of common long-term goals as retirement, maybe saving for a kid’s education, or maybe buying a house.”
Long-term investments often gain value slowly, weathering short- to medium-term fluctuations in the market.
Investors usually build long-term investments into balanced portfolios that consider their goals, risk tolerance, and time horizon. Usually, investors hold these investments for a few years or more to help fund long-term goals, like retirement or saving for a child’s college education.
Any investment can be a long-term investment, but the foundation of a long-term investment portfolio is typically a mix of stocks, bonds, mutual funds, and exchange-traded funds (ETFs). Long-term portfolios may hold other assets, such as REITs (real estate investment trusts).
What Is a Short-Term Investment?
Short-term investments are assets that investors hold for less than one year. Investors typically use these investments to help fund short-term financial goals, such as saving three to six months’ worth of expenses in an emergency fund, saving to buy a new car, or saving for the down payment on a home.
Investors can hold almost any investment in the short term, including stocks, bonds, and ETFs. Many investors trade these assets in short periods, like days, weeks, and months, to profit from short-term price movements.
However, short-term strategies can be risky and volatile, potentially resulting in losses in a short period. Therefore, some individuals may consider less risky savings vehicles, such as certificates of deposit (CDs), high-yield savings accounts, or investing in short-term bonds.
While these may not offer the potentially higher returns of investing in the stock market for the long term, they may provide more stable returns over a short period.
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The Differences Between Long-Term and Short-Term Investments
As mentioned above, long-term and short-term investments have several differences. For example, investors typically buy long-term investments to hold for many years, only selling the assets when they need the funds. In contrast, investors usually make short-term investments to get a return within a period as short as a day and as long as a year.
Additionally, the IRS taxes the gains on long-term and short-term investments at different capital gains tax rates.
The Similarities Between Long-Term and Short-Term Investments
Investors may use both long-term and short-term investments to attempt to see a return on a capital investment. Both could involve investing in similar types of assets, such as stocks, funds, bonds, or alternative like real estate, and both may involve diversification across different asset types. An investor could also potentially have a short- and long-term investment in the same asset, depending on their goals.
Additionally, long-term and short-term investments each involve some degree of risk; there are no guarantees with any investments.
What About Day Trading?
As mentioned above, some investors trade assets, like stocks, ETFs, and options, in short time frames to profit from volatile price movements.
Day trading is a style of this short-term investing, where investors hope to buy and sell a stock for a modest profit, usually within the same day. By nature, day traders are exploiting volatility in the stock market. As stock prices fluctuate throughout the day, they hope to capitalize on upswings, buying low and selling slightly higher.
While it may sound exciting, day trading is not appropriate for most investors. That’s because the profits for day trades can be relatively small, and investment fees and taxes can eat into even those modest profits.
While investors can turn a profit by day trading, it’s equally likely that they will lose money, and therefore is considered a high-risk strategy.
What’s more, day traders are competing with professionals who have lots of sophisticated tools and information at their disposal to help them succeed. These professionals are often moving large sums of money and attempting to turn a profit on tiny gains. Even these experts fail to time the market much of the time.
Long-Term Investing and Compounding Returns
Compounding returns may be one of the more powerful tools available to investors. They are why even seemingly small amounts invested today can go a long way in the future. Stocks, mutual funds, and ETFs are some of the types of investments that may earn compounding returns.
The idea is simple: investments hopefully earn returns, and when those returns are reinvested, they may also start to earn returns. As a result, investor’s funds might grow at an exponential rate over time. Of course, there is no guarantee that any investment will earn a return. And investments that may potentially earn a higher return also tend to be higher risk.
Still, the cumulative effect of compounding over the long-term has the potential to be significant. The longer the investor can allow their returns to compound, the more money they may be able to make.
As a result, investors may want to consider compounding as more a part of a long-term investment strategy than a short-term strategy.
Tax Differences Between Long- and Short-term Investments
The federal government charges different capital gains tax rates on investment profits depending on how long an individual holds their investments. So, when an investment or asset is sold, it triggers a taxable event. The effective tax rate depends on how long the investor had owned the asset.
Investments sold after more than a year are subject to the current long-term capital gains rate, which is equal to 0%, 15%, or 20%, depending on an investor’s income and the type of investment.
The long-term capital gains rate might be much less than the investor’s income tax rate, which can help incentivize investors to hang on to their investments over the long run.
Investments sold in a year or less are subject to short-term capital gains. The short-term capital gains are taxed as regular income and are determined by an investor’s tax bracket.
Investors considering short-term investments of less than a year should be sure to factor in the cost of paying the higher short-term capital gains tax rate, or seek advice from a tax or financial professional.
Capital Gains Tax Rates
|
Long-Term Capital Gains Tax Rates for 2026 (for Tax Season 2027) |
||||
|---|---|---|---|---|
| Tax Rate | Single | Married Filing Jointly | Married Filing Separately | Head of Household |
| 0% | $0 to $48,350 | $0 to $96,700 | $0 to $48,350 | $0 to $64,750 |
| 15% | $48,351 to $533,400 | $96,701 to $600,050 | $48,351 to $300,000 | $64,751 to $566,700 |
| 20% | More than $533,400 | More than $600,050 | More than $300,000 | More than $566,700 |
| Source: Internal Revenue Service | ||||
|
Short-Term Capital Gains and Income Tax Rates for 2025 (for Tax Season 2026) |
||||
|---|---|---|---|---|
| Tax Rate | Single | Married Filing Jointly | Married Filing Separately | Head of Household |
| 10% | $0 to $11,925 | $0 to $23,850 | $0 to $11,925 | $0 to $17,000 |
| 12% | $11,926 to $48,475 | $23,851 to $96,950 | $11,926 to $48,475 | $17,001 to $64,850 |
| 22% | $48,476 to $103,350 | $96,951 to $206,700 | $48,476 to $103,350 | $64,851 to $103,350 |
| 24% | $103,351 to $197,300 | $206,701 to $394,600 | $103,351 to $197,300 | $103,351 to $197,300 |
| 32% | $197,301 to $250,525 | $394,601 to $501,050 | $197,301 to $250,525 | $197,301 to $250,500 |
| 35% | $250,526 to $626,350 | $501,051 to $751,600 | $250,526 to $375,800 | $250,501 to $626,350 |
| 37% | More than $626,350 | More than $751,600 | More than $375,800 | More than $626,350 |
| Source: Internal Revenue Service | ||||
Finding the Right Approach
Whether an investment is meant for the short or long term can significantly impact whether an investor chooses an active or passive investment strategy.
Active Investing for Short Term Goals
Active investing is a hands-on investment approach and often goes with a short-term investment strategy, like day trading.
Active investing might mean hiring an investment manager who will handpick investments, buying and selling them in a short time frame to try to beat the market. Because of their active involvement, these managers often charge relatively high fees.
Individual investors may also pursue this strategy, choosing investments and deciding when to buy and sell. This approach can be much cheaper than hiring a professional.
An active strategy may work well for an individual saving for a near-term goal who wants the flexibility of being able to choose specific financial instruments, such as short-term bonds, to help them save.
However, an active investing strategy to make short-term gains is risky and not appropriate for all investors.
Passive Investing for Long-Term Holding
Passive investing is a relatively hands-off strategy in which investors attempt to match the movement of a market index, often by using mutual funds, ETFs, or index funds.
For example, some funds might track the S&P 500, owning all of the companies tracked by that index at the same proportion and percentages they make up there.
Passive investments are not necessarily trying to capitalize on short-term movements in the market. Instead, they are trying to track the market over the long run. Passive investment strategies often come with low or no fees.
Any index is likely to experience ups and downs. Investors taking a long-term approach may have time to ride out rocky patches.
Holding Short-Term vs Long-Term Investments
Investment time horizon can also play an important role in where an investor holds their investments.
Short-term investors will need to open a brokerage account to trade stocks and other securities. Investors can place orders to buy and sell stocks and bonds online or by phone through a broker.
Brokerage accounts are taxable, meaning that any gains an investor makes are subject to capital gains taxes. Investors can sell securities and withdraw their funds at any time.
Long-term investors may want to consider several investment accounts, including a brokerage account, to help meet their long-term goals.
Long-Term Investing with a 529 Plan
An investor saving for a child’s college education might consider a tax-advantaged 529 savings plan. Parents, as well as extended family and friends, can contribute to 529 plans. Funds inside the account can then be invested in various investments, including mutual funds and exchange-traded funds.
Investments grow tax-free inside a 529 account and are not subject to capital gains tax. Withdrawals from the account are also tax-free as long as they are used to cover qualified education expenses, such as tuition, room and board, fees, and books.
Withdrawing the money for other reasons can subject investors to income tax and a 10% penalty on earnings.
Long-Term Investing With a 401(k)
Retirement is perhaps the ultimate long-term goal for many investors. There are a number of different options for saving for retirement, including employer-sponsored 401(k)s.
Traditional 401(k)s are employer-sponsored plans that allow eligible employees to set aside a portion of their pre-tax paycheck into an investment account. They can usually invest their funds in a limited suite of investment options, such as mutual or target-date funds.
Investments grow tax-deferred, which may supercharge growth when combined with the power of compounding returns.
After age 59 ½, investors can make withdrawals, which are subject to income tax. Withdrawals before that age are subject to income tax and a 10% penalty, although there are some exceptions to that rule.
Retirement Options Other Than a 401(k)
Workers who don’t have access to a 401(k) — or those who do and want to save more — may want to consider a traditional or Roth IRA to invest in for retirement. Investors can fund traditional and Roth IRAs up to certain limits and invest the money however they want.
Traditional IRAs are funded with pre-tax money. Funds grow tax deferred and are subject to income tax once withdrawn after age 59 ½. As with 401(k)s, withdrawals made before this point are subject to income tax and a 10% penalty.
Roth IRAs, on the other hand, are funded with after-tax dollars. Investments inside these accounts grow tax-free and are not subject to income tax once withdrawn after age 59 ½.
Each of these retirement accounts potentially ties up investors’ money for decades, and early withdrawals are subject to stiff penalties. They should be considered chiefly as long-term investment tools.
Deciding Between Short-Term vs Long-Term Investments
A mix of long- and short-term investments can lead to a diversified portfolio that can help investors achieve financial goals. This is especially true if you invest in long-term assets, like stocks and ETFs, for retirement or long-term savings. You can use short-term investments, like CDs or a money market account, to fund a vacation or build up an emergency fund.
However, if you are looking to make short-term profits through trading securities like stocks, ETFs, or options, you have to make sure you have the risk tolerance and time to take on this strategy. Most financial specialists do not recommend that investors take on this strategy.
The Takeaway
Once you’ve decided on long-term or short-term investments or a mix of both, you’ll need to open the appropriate accounts in order to begin. For instance, you can open an online IRA if that’s something you’re interested in, or open a brokerage account to trade assets like stocks and ETFs.
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FAQ
What are the differences between long-term and short-term investments?
The main difference between long-term and short-term investments is the time each type of investment is held. Long-term investments are held for more than a year and typically several years, while short-term investments are held for less than a year — often only days, weeks, or months.
What are the similarities between long-term and short-term investments?
The similarities between long-term and short-term investments are that they are both types of investments, and they both have the potential to help investors build wealth. In addition, they each involve some degree of risk.
How long must I hold an investment to pay long-term capital gains versus short-term?
Investments need to be held for more than one year to be subject to long-term capital gains taxes versus short-term.
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