Long-term investments refer to assets purchased with the intention of being held for over one year. As opposed to short-term investments that focus on liquidity and minimizing risk, long-term investments aim for capital appreciation over time. However, long-term investments cannot include short-term assets that are expected to be converted to cash within a year. This article will elaborate on what long-term investments entail and what assets they cannot include.
Long-term investments are intended to be held for over 1 year
The key defining characteristic of a long-term investment is the intention to hold the asset for over one year. This time horizon allows for riding out short-term market fluctuations and benefitting from the potential for appreciation over an extended period. Investments like stocks, bonds, real estate, and collectibles are commonly considered long-term assets.
Liquidity is not a priority for long-term investments
Unlike short-term investments like money market funds that aim to balance returns with liquidity, long-term investments prioritize returns and capital appreciation over liquidity. There is an expectation that the money will remain invested for years, so immediate access to the funds is not a requirement.
Short-term assets do not qualify as long-term investments
Current assets that are expected to be converted to cash within a year, like accounts receivable, inventory, and prepaid expenses, do not qualify as long-term investments. Even though they are assets on the balance sheet, their short-term, liquid nature means they do not align with the intended holding period and objectives of long-term investments.
Tangible assets may be long-term, intangible assets less likely
Tangible assets like property, plant, and equipment that are intended to be productive for many years are well-suited as long-term investments. Intangible assets like patents and trademarks that derive value from legal ownership or competitive advantage may also qualify, but their suitability depends more on the specific circumstances.
Individual time horizon is also a consideration
While one year is the general cutoff, an individual investor’s own time horizon also plays a role in determining what qualifies as a long-term investment for them specifically. Retirees have shorter investment horizons than young accumulators, so their definition of long-term assets may be different.
In summary, long-term investments are assets purchased with the intention of being held for over a year. They prioritize returns over liquidity and cannot include short-term assets like cash, receivables, and inventory that will be converted to cash within a year. The potential for appreciation over an extended period is the key appeal of long-term investments for most investors.