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Short-, medium- and long-term in financial investments

Perhaps these terms are ambiguous, but they are useful for choosing the best way to invest your savings, above all when uncertainty on the financial markets increases, as is currently the case.

If you are trying to get an idea of how to invest your savings, perhaps by searching for information on the web, you might easily come across expressions such as 'short-term', 'medium-term' and 'long-term', or similar ones such as 'short, medium and long run'. If you contact a financial advisor, they will probably ask about your 'time horizon' (if they don't, find another advisor!!). You will find out that keeping your money in the bank is more suitable in the short term; bonds, such as many government securities, are suitable in the medium term and shares in the long term. At this time of losses in the stock markets, some people may suggest that you keep your investments in shares if you have long-term objectives.

When referring to financial investments, short-, medium- and long-term refer to the 'time horizon' of your investments, i.e. the period you imagine leaving your money invested without needing to spend it.

How long are short- medium- and long term?

There are no exact definitions, but short-term usually means a period shorter than two years, medium-term covers a range from 2 to 5 or 10 years and long-term is a period longer than 5 or 10 years. If we talk about the long run, perhaps the definition of 'over 10 years' is more useful, because periods as long as that probably cover a whole financial cycle - with many fluctuations in the stock market - that some experts believe lasts for seven years on average. This is important, because if you keep an investment in shares for at least 10 years, the risk of purchasing at the highest price and selling at the lowest, which is the worst scenario for your savings, is reduced.

Why is the time horizon of an investment important?

At this point, you may have understood that the concepts of short-, medium- and long-term are inextricably tied to those of financial risk. For instance, if you are thinking of buying a car with your savings over a period of two years, you certainly don't want to take the risk of only being able to afford a wreck because, for example, the value of the shares you bought with your savings has dropped: indeed, shares are very risky in the short term. In this case, it would be appropriate to invest a fair slice of your savings in things that are not so risky, such as deposits and short-term government bonds.

On the other hand, if you are saving primarily for your retirement in 30 years' time, it might be a good idea to invest a substantial part of your savings in shares, which are risky but have higher expected returns. In the short and medium term, shares can even face high fluctuations, but in the long run, the risk of a loss decreases. In the case of the American stock market, for instance, if an individual had kept their investment in shares for anything up to at least 17 years in the period between 1901 and 2021, which encompasses financial crises, world wars and radical transformations in the global economy, they would have earned a positive return.

All clear? Well, investing, just like many other activities, is not easy at all. Even if there is a consensus on everything you've just read, not all the experts agree on the fact that in the long run the risk of shares decreases. Paul Samuelson, Nobel Prize winner in Economic Science, was one of them, and John Maynard Keynes, one of the greatest economists of the last century, stated, although in a different context, that 'in the long run we are all dead' and that, therefore, we can't rely on the long run!