What Is Medium Term?
Medium term is a holding period or investment horizon that is intermediate in nature. The exact period of time that is considered medium term depends on the investor's personal preferences, as well as on the asset class under consideration.
In the fixed-income market, bonds that have a maturity period of 2 to 10 years are considered to be medium-term bonds.
Key Takeaways
- Medium term is a holding period or investment horizon that is intermediate in nature.
- The exact period of time that is considered medium term depends on the investor's personal preferences, as well as on the asset class under consideration.
- In the fixed-income market, bonds that have a maturity period of 2 to 10 years are considered to be medium-term bonds.
A day trader who seldom holds open positions overnight may consider a stock that is held for a couple of weeks as a medium-term position, whereas a long-term investor might define medium term as a holding period of one to three years. Similarly, homeowners may regard anything less than 10 years as a medium-term horizon as it relates to real estate.
Medium term can be contrasted with both short term (often regarded as less than a year or two) and long term (longer than 10 years).
Understanding Medium Term
Determining an investment's time horizon, also called its term, is usually based on the intention or goal behind the investment, rather than the nature of the investment itself. An investor might consider when the funds will be used for other goals, or whether a lump sum or an income stream is the desired result. The most common terms are short, medium, and long.
Though the term does not necessarily denote a specific length of time, many consider anything below two years to be short-term; from two to ten years as medium term; and anything beyond 10 years to be long term. Since these timeframes are flexible and open to interpretation, what might be a medium-term investment for one person might be characterized as a long-term investment for a different investor.
An investor's risk tolerance is heavily influenced by the term of the investment. For example, if you intend to purchase a car within the next two years, it's wise to invest conservatively. You might consider a traditional savings accounts or a CD (assuming the appropriate time until maturity). Since the funds are required soon, volatility in higher-risk markets may actually prevent one's goals from being reached.
When saving for longer-term goals, such as retirement in 20 years, you can generally afford to take on a greater level of risk with the goal of generating higher returns early. Since the funds will not be required for quite some time, the account can withstand a certain degree of market fluctuations. As a person begins getting closer to retirement age, the assigned time horizon may shift from long-term to medium-term, prompting a move toward more conservative investments.
If your goals are medium-term, you should seek a balance between risk and returns—act more conservatively than if your goals were long-term but opt for more risk than if your goals were short-term options. Some examples of medium-term investments are various types of bonds (with maturity dates between three and 10 years), income funds, or growth funds.
