Short Term Investments
In economics, the common wisdom is that pay off has a positive correlation with risk. Or, in other words: The higher the risk of failure, the higher the potential profit. Which is perhaps a disappointing adage, but it isn’t very hard to understand. Essentially, the more risky something is, the less people want to be involved with it, the more money there is to go around for those that are involved in it. The disappointing thing is that it is often difficult to recognize one of these investments when it comes along because they inherently look like a risky investment. Another factor that can greatly complicate risky investments is timing. Sometimes, a risky investment may only be profitable for a very particular amount of time, which is often very difficult to calculate. In these cases, an investor's ability to profit rest heavily on their ability to time the performance of a particular investment and the market around them. These types of investments are short-term investments. Generally speaking, the profitability of short-term investments is entirely based on the high risk and volatility of short-term investments.
Short Term Vs Long Term
Short term and long term aren’t phrases that denote a specific amount of time. They imply relative amounts of time and are perhaps more closely related with the behavior of investors than days or months. Long term investing means that an investment is intended to be parked in one asset for a considerable amount of time, almost without regard to the performance of the market. Essentially, the investor is evaluating the performance of the asset over a long period of time and hopes to average a particular return, even if the market fluctuates during this time period. Investments of this nature typically have low rates of return in the short-run because they are investments that have less risk and volatility associated with them. Since their behavior is relatively easy to predict over long periods of time, more individuals are invested in them, which lowers the expected rate of return.
In contrast, the goal for short-term investments is to acquire them when they are (relatively) cheap and sell when they reach their peak value. The problem with this is that there is no way to know for certain that a particular investment has reached its peak value, at least until a substantial amount of time after a peak has occurred. If investors can sell relatively close to the peak value, then they come out on top. However, if investors make the mistake of selling too early or holding onto the investment for too long-- they stand to lose all of their initial investment.
Keeping track of short-term investments can require a degree of attention that isn’t quite so necessary for long-term investments. Of course, its important to watch all investments, but those rated for long-term are usually labeled as such specifically because they have been established through precedence. Short-term investments on the other hand, are expected to balloon and peak somewhat quickly, or have not existed long enough to be considered a safe long-term investment. This constant demand for attention makes short-term investing a high stakes activity where small mistakes can lead to large losses.
Despite the potential for large losses in short-term investing, its not necessarily worse than long term investing, its just a different type of investing. Generally, investors will recommend that younger clients have more short-term assets in their portfolios, then gradually convert to longer term assets as they age. This is because over time, the losses from a few failed short term assets can be recouped by a few successful ones.
Some currencies are considered to be good long-term investments and others are considered to be short-term investments. However, by their nature, currencies are constantly fluctuating in value. Especially after the global destabilization that has persisted after The Great Recession, currency markets have become a bit more volatile than they’ve been in the recent past.
Currencies are perhaps best evaluated on a case by case basis, but under ideal conditions, the more stable currencies of westernized nations are considered to be long-term investments. However, growth in these assets can be very slow, sometimes only keeping pace with inflation. Currencies of this nature are typically considered to be the safest type of investment and US Bonds generally fall under this category. Overtime, they might not increase in value, but if they keep pace with inflation, money invested in these assets shouldn’t lose value either.
Short-term currencies can be a bit more complicated because there are many different reasons for investing in them. A very general scenario might include investing in the currencies of developing nations. In an ideal situation, where a developing nation has all the right ingredients for growth, this can be a very lucrative investment. However, there are many variables that go into creating an environment suitable for sustainable growth and many of them are not easily observable. Culture, political policies, base infrastructure and education are just a tiny fraction of factors that can have a large influence on the sustainable growth of a particular area.
Sometimes, short-term investing in currencies is being able to determine exactly how much growth a particular locality can tolerate. In these situations, investors want to place their money, but remove their investments before a particular region reaches its capacity for growth and has to restructure. These types of investments are perhaps some of the most difficult to calculate accurately, but in accordance with economic law: this higher risk is correlated with higher reward.
Currency markets can be extremely complicated. Here at treasury vault, we can help you navigate these confusing markets and help you grasp what’s going on in terms that you can understand. Our experienced professionals aren’t just watching currency markets and ticker tape. We are constantly immersing ourselves in world news and other sources that give us indicators as to what the future of currency markets holds. If you have any questions about currencies, precious metals or how to obtain them, please don’t hesitate to contact us. We are passionate about what we do and we want you to be passionate about it too.