Question

There are many kinds of risk, what kind of Risk is important to you?

- When investing short-term?

- When investing long-term?

Answer 1

Short term investment may turn risky. Following points can justify this argument:

• Short term capital gains are often taxed differently and are generally higher than long term capital gains. Which means you might end up getting lower return actually.
• Many investments fall in short term but grow in long run. Hence risk of losing capital remains in short term investment.
• Short term investments often include more expenses than long term investment viz transaction fee, brokerage etc

Long term investment might turn risky in following situations:

• Opportunity cost is higher in long term investment. Suppose you have invested in a security paying you a coupon of 8% per annum for 20 years. Suppose during the currency of this investment if federal rates go up than 8% you will start incurring opportunity loss as you can't exit from your existing investment. So your investment is exposed to interest rate risk in long run.
• Potential return of your long term investment portfolio averages over longer spans. As it sees various ups and downs during its currency (or tenure)
• Risk of defaulting the payment on maturity by the issuer is also there in long term investment as the performance of the company/business might get worse in years to come.