What Is Medium Term?
Medium term is an asset 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 five 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 may 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 when it comes to real estate.
Understanding Medium Term
Determining an investments horizon, or term, is often based on the intention behind the investment more than the investment itself, such as 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 generally considered short, medium and long.
Though the term does not necessarily denote a specific length of time, most consider anything below three years to be short-term; from three to 10 years as medium term; and anything beyond 10 years to be long term. Since these timeframes are considered flexible, what may be a medium-term investment for one person may feel like a long-term investment to others, and vice versa.
Risk Tolerance, Return Rates and Term Lengths
An investors risk tolerance is heavily influenced by the term of the investment - and the term of the investment is often decided by what the money will be used for and when. For example, if you intend to purchase a car within the next two years, then it's wise to invest conservatively in tools such as traditional savings accounts or a CD with an appropriate time until maturity. Since the funds are required soon, volatility in higher risk markets may actually prevent your goal from being reached.
Longer-term goals, such as retirement savings with over 20 years until retirement, can generally afford more risk. Since the funds will not be required for quite some time, the account can withstand certain market fluctuations in hopes of bringing in higher returns early. 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.
Medium-term goals often look for a balance between risk and return, being more conservative than long-term investments, but more risk tolerant than short-term options. Medium-term investments may include various bonds with maturity dates between three and 10 years. A medium term investment portfolio could also dedicate some of the capital to income funds or even growth funds to try and take advantage of the extra time compared to a shorter term portfolio where capital preservation is paramount.