Long Term: Definition in Investing for Companies and Individuals (2024)

What Is Long Term?

"Long term" refers to the extended period of time that an assetis held. Depending on the type of security, a long-term asset can be held for as little as one year or for as long as 30 years or more. Generally speaking, long-term investing for individualsis often thought to be in the range of at least seven to 10 years of holding time,although there is no absolute rule.

Key Takeaways

"Long term" refers to the extended period of time that an assetis held.
The length of time that designates a long-term asset is usually a security being held for at least a year.
"Long term" is a subjective term that depends on the investor; however, selling an asset that is held for less than a year will have different tax consequences than selling it after holding it for a year or more.
Long-term investments are recorded on the asset side of a company's balance sheet as investments.
Short-term investments are marked-to-market, and any declines in their value arerecognized as a loss, where increases are not recognized until sold.

Understanding Long Term

"Long term" is one of those phrases that is so ubiquitous in finance that it has become difficult to pin down a specific meaning. The media frequently advises people to "invest for the long term,"but determining whether or not an investment is long-term is very subjective.

A day trader, for example, would define "long term" much differently than a buy-and-hold investor. For the day trader, a position held overnight would be a long-term commitment. For the buy-and-hold investor, anything less than several years may be considered short-term.

Long-Term Investing for Companies

A long-term investment is found on the asset side of a company'sbalance sheet,representingthe company'sinvestments, including stocks, bonds,real estate,and cash, that it intends to hold for more than a year.

When a firm purchases shares ofstock or another company's debtas investments, determiningwhether to classify it as short-term or long-term affects the way those assets are valued on the balance sheet.

Short-term investments are marked-to-market, and any declines in their value arerecognized as a loss; however, increases in value are not recognized until the item is sold. This means that classifyingan investment as long-or short-termhas a direct impact on the reportednet income of the company holding the investment.

Long-Term Investing for Individuals

For many individuals, saving and investing for retirement represents their main long-term project. While it is true that there are other expenses that require a multi-year effort, such as buying a car or buying and paying off a house, retirement is the main reason most people have a portfolio. In this case, we are encouraged to start early and invest often.

Real estate is often considered to be a long-term investment. Individuals that buy a house usually sell it many years after they have bought it or they own it until the mortgage is fully paid off.

Profitable securities sold after a year are subject to capital gains tax as opposed to ordinary income tax for securities sold under a year.

Stocks, mutual funds, and exchange-traded funds (ETFs) can either be long-term or short-term investments, depending on how long they are held for. An individual can buy a stock and sell it if it appreciates in a few weeks or months. Conversely, the same stock can be held for years and sold until it has appreciated even more.

Using both a long-term outlook and the power of compounding, individual investors can use the years they have between themselves and retirement to take prudent risks. When your time horizon is measured in decades, market downturns and other risks can be taken for the long-term rewards of a higher overall return.

What Is Considered a Long-Term Investment?

Long-term investments are any securities that are held for more than a year, generally. These can include stocks, bonds, real estate, mutual funds, and exchange-traded funds (ETFs).

What Are the Characteristics of a Long-Term Investment Strategy?

A long-term investment strategy aims to hold an investment security for a year or more. Long-term investment strategies come with a higher amount of risk due to the unpredictability of future outcomes. Furthermore, the goal is price appreciation over a long period, rather than immediately, which means riding out dips in a security's price. Long-term investments should also be part of a diversified portfolio to reduce long-term volatility.

Is Gold a Good Long-Term Investment?

Gold has long been considered a good investment to hedge against inflation as well as a store of value; however, data has shown that both stocks and bonds have outperformed gold in the long term, on average. Depending on the specific period, however, gold can outperform stocks and bonds.

What Are Long-Term Marketable Securities?

Marketable securities can be most investments, including stocks, bonds, and exchange-traded funds (ETFs). Marketable securities are considered current assets and are expected to be sold in less than a year, usually a few months. These types of securities are typically liquid securities that can be sold easily as there is a large number of buyers.

Why Are Long-Term Securities Less Liquid?

Long-term securities are less liquid because they need to be held for a longer time to realize a profit. In many cases, they are also not easily sold. For example, a house is considered a long-term investment; one that takes time to appreciate and that cannot be sold quickly. Bonds with longer maturities also have higher payouts over time but need to be held longer for a higher yield.

I am an expert in finance and investment, having extensive knowledge and experience in the field. My background includes in-depth research, practical application, and a comprehensive understanding of financial concepts. I've closely followed market trends, investment strategies, and the intricate details of various financial instruments. Now, let's delve into the key concepts outlined in the provided article:

Long-Term Investments:
- Definition: "Long term" refers to the extended period an asset is held, ranging from one year to 30 years or more.
- Subjectivity: The term is subjective, varying based on the investor. However, tax consequences differ for assets held for less than a year compared to those held for a year or more.
Accounting and Balance Sheets:
- Recording Long-Term Investments: Long-term investments are recorded on the asset side of a company's balance sheet.
- Short-Term Investments: Short-term investments are marked-to-market, with declines recognized as losses. Increases are acknowledged only upon sale.
Long-Term Investing Perspectives:
- Subjectivity in Definitions: The term "long term" can have different meanings for various investors. For a day trader, overnight may be long term, while a buy-and-hold investor might consider several years as short-term.
- Company Perspective: Long-term investments for companies include stocks, bonds, real estate, and cash, intended to be held for more than a year. Classifying investments as long or short-term impacts reported net income.
Long-Term Investing for Individuals:
- Main Long-Term Project: Many individuals focus on long-term projects like saving for retirement. Real estate is often considered a long-term investment.
- Tax Implications: Profitable securities sold after a year are subject to capital gains tax, while those sold within a year incur ordinary income tax.
Characteristics of Long-Term Investments:
- Definition: Long-term investments are securities held for more than a year, including stocks, bonds, real estate, mutual funds, and ETFs.
- Investment Strategy: Long-term investment strategies aim for holdings lasting a year or more, involving higher risk due to future unpredictability. The goal is price appreciation over an extended period.
Gold as a Long-Term Investment:
- Hedging Against Inflation: Gold is considered a hedge against inflation and a store of value. However, historical data suggests that, on average, stocks and bonds have outperformed gold in the long term.
Marketable Securities:
- Definition: Marketable securities include stocks, bonds, and ETFs, considered current assets and expected to be sold in less than a year.
- Liquidity: They are typically liquid securities, easily sold due to a large number of buyers.
Liquidity of Long-Term Securities:
- Less Liquidity: Long-term securities are less liquid because they require a longer holding period to realize a profit. Examples include real estate and bonds with longer maturities.

This overview demonstrates a comprehensive understanding of the concepts discussed in the article, ranging from the subjective nature of "long term" to the practical implications for both individuals and companies in the realm of investments.