Long-Term vs. Short-Term Horizons

Every well-balanced portfolio should include a mix of short- and long-term investing opportunities. How you distribute your money between these two investments depends on many factors, one of which is your investing horizon. Some investors can tolerate short-term risk for long-term rewards, while others may need more stability even if it comes with the potential for lower returns. This is the key differentiator between long-term and short-term horizons, although there’s much more to the story.

In this piece, we will break down short- vs. long-term horizons, provide examples of each, and demonstrate how they can impact your approach to investing and portfolio diversification.

What is an Investment Horizon Period?

You’re probably familiar with long- versus short-term investments, but might be less clear on what an investment horizon entails.

An investment horizon period measures how long you plan to invest in something—be it a series of portfolio holdings or a life event, such as buying a house or saving for retirement. Time horizons help you determine how risky, or aggressive, your portfolio can be. Short horizon periods call for investments that are less risky, such as bonds, mutual funds (or investments with even longer hold periods, such as farmland investing). If your investing horizon is short, you have less time to make back what you’ve lost on a high-risk investment. If you’re working with a long-term investing horizon, however, you have a little more time to weather out market volatility.

Investment horizons are different from long- and short-term investments, even though they may sound similar. An investment horizon deals with how long you, as an investor, plan to continue investing. In your 30s, your retirement investing would be considered long-term, since you’re not going to retire any time soon. In your 50s, however, your investment period would be considered short-term, since you’re much closer to retirement

The general premise is that most sound investments should appreciate over time. If you don’t need to pull your money out of the markets for a while, you can likely afford to be more aggressive in the early years in order to maximize opportunities. Then, as you get closer to your time goal, you can taper your investment mix to be more conservative. This will help lock in gains made earlier on.

What are Long-Term Horizon Investments?

Long-term horizon investments are designed, much like long-term investments, to appreciate over the long haul. For example, a long-term horizon investment strategy works best for retirement or college savings. These investments have years to appreciate before you’ll need to pull out your money, meaning they should be able to better weather financial volatility that tends to balance out the longer you hold your assets

A long-term horizon investing strategy may start off more aggressive in terms of its asset allocation. Most tend to be stock-heavy earlier on since stock gains can be higher than more conservative funds or bonds.

If you began investing for retirement in your 20s or 30s, you’d have more time for assets to appreciate as you got closer to retiring. Thus, you’d likely be better positioned to take a more aggressive stance earlier on since you have more time for volatility to smooth out.

What are Short-Term Horizon Investments?

Short-term horizon investments are on the opposite end of the spectrum in terms of risk and time. A short-term horizon means you’re looking to pull money from your investments sooner. Saving for a car or home are two common short-term horizon investments.

If you pursue a stock-heavy portfolio as your main short-horizon investment goal, you may run a significant risk of assets losing value if the market takes a turn. That’s why most short-term horizon investing means being conservative: think bonds, funds, and certain alternative assets.

A short-term horizon investing strategy is also the right fit for most investors close to retirement. Keeping too much money in stocks at 55 years old could mean you’re flirting with major losses if the market dives.

The Importance of Long- and Short-Term Investments

You don’t have to pick one or the other: long- and short-term investments usually work in tandem with one another. Bonds, for example, are long-term investments that help you build steady returns; stocks are more volatile but may generate larger returns than bonds. Plus, you can sell whenever you like, with no term included.

A long-term horizon portfolio needs to set the right pace for growth while tempering risk, all so you can either cash out in the near term or so you can expand your retirement nest egg as early as possible. Short horizon investing means taking a more conservative approach while still leaving some wiggle room for growth and volatility.

It’s critical to look at your portfolio as a balance of these two investing horizons. Too aggressive in the short-term could mean leaving yourself exposed to market conditions—potentially wiping away your gains. Going too conservative on a long horizon investment portfolio might mean potentially losing out on bigger gains that could have grown your nest egg even bigger early on.

Picking the Right Investments for Your Portfolio

As we mentioned earlier, the right portfolio should have some mix of short-term horizon and long-term horizon assets. Usually, this is demonstrated as a ratio: for example, if you're under 40, you're likely to be either 90% equities and 10% fixed income or even 100% equities. If you’re in your early 60s, you may want to have 75% fixed income and 25% in equities—essentially going from an aggressive to conservative investment strategy.

In most scenarios, you’re going to incorporate some blend of long- and short-term assets in your portfolio. Long-term assets serve as a bulwark against short-term losses, each with its own rate of return. Some have a low rate of return, such as a Certificate of Deposit that offers you a small amount of interest during the length of the CD maturity period. Others, like farmland investing, can offer a generous rate of return in exchange for the long hold period required.

Loss Probability vs Time Horizon

Data: Robert Shiller

Don’t overlook the importance of long-term investments in your overall portfolio, no matter your age. Some investors make the mistake of neglecting an overly aggressive portfolio until the market drops—taking their retirement savings along with it. A set-it-and-forget-it approach isn’t always advised over the long term, so you’ll want to make sure you’ve got the right mix of the right assets. Here, not all options are created equal.

The Role of Farmland Investing

Farmland investing is a savvy investing option for those who want to blend the best of both worlds that long- and short-term horizon investing has to offer. Most long-term investments offer security but little interest in exchange; farmland, on the other hand, offers anticipated rates of return that can be multitudes greater than Treasury bonds.

At the same time, many farmland investments don’t require a decade-long hold period either. Row crops, for example, do not require time for the plants to mature. They're short-cycle plants that can provide investors with stable returns and greater flexibility, given that a farmer can swap out different row crops to keep up with popularity and asking price. This means you can still incorporate farmland investing into your short- or long-term investment strategy to maximize upside. This also offers the potential to build security into your portfolio, no matter your allocation ratio.

Farmland has demonstrated itself to be a stable, steady appreciator for long-term investors. The asset class has grown in value, per decade, since the 1990s. Bonds, although popular, historically have much broader valuation swings. U.S. 10-year savings bond interest rates dropped from December 2019 through July 2020, only now climbing back up to where rates were three years ago.

Source: Yahoo! Finance, USDA ERS

Stocks have historically fluctuated much more throughout this same period as bond yields decreased and farmland value increased. The market has, however, managed not to erase value year-on-year. This is good for long-horizon investors, but not ideal for short-horizon investors. Let’s say you forget to harvest your stock gains as you get closer to retirement. A stock market swoon, such as the one we saw during the Great Recession, can knock out a lifetime’s worth of investing and saving.

Farmland investing stayed stable and, on average, increased from the 2008 recession all the way to the present. This means farmland has stayed steady even when markets (and even bonds, for example) lost value precipitously.

Striking the Right Balance

Every smart investor should find a way to blend long-term and short-term horizon investments. The ratio between the two is a major determinant of what—and how much of it—you should hold. Investors who are looking for a longer-term, stable investment, should look toward farmland as one of the most appealing options.

If it’s new to you as an investor, that may be due to a lack of entry opportunities. Before FarmTogether and fractional investing, it was extremely difficult for individuals to own farmland. FarmTogether makes it easier for investors to get in on the solid opportunities farmland investing provides. You can use the FarmTogether platform to invest as little as $15,000. Each of FarmTogether’s opportunities has been fully vetted by our team of experts, meaning you can trust that the behind-the-scenes work was done and due diligence exercised.

Knowing your investing time frame can be crucial, but so is picking the right investment types within your ratio. Farmland investing is an excellent option for accredited investors who want to add a long-term asset that has historically outperformed other alternative or conventional investments designed to do the same thing. Getting started is as easy as creating your FarmTogether account, which will put you on the path toward incorporating farmland into your holdings.