Profitable short-term investments often come at the cost of high volatility, as evidenced by equity investments. Although on paper, some financial products or financial practices offer attractive short-term returns, the absence of a capital guarantee tarnishes the picture.
On the other hand, guaranteed investments such as bank books offer such low stable returns that it is difficult to compete with inflation to obtain a positive real return.
So, in such a context, is it possible to make a profitable investment in the short term with a low risk of loss?
By combining expertise and know-how, real estate investment can offer high short-term profitability, provided of course that a few good practices are followed. What about other investment strategies? Can they compete with real estate?
Why make a profitable investment in the short term?
Before investing, you should ask yourself the right questions about the objective of your investment.
From the moment your investment is in a short-term perspective, you must justify the reason for such a choice.
Indeed, it does not seem appropriate to sell real estate with a high yield after 5 years if it is to place the result of the sale in a bank book or a life insurance fund in euros.
Depending on the nature of your objectives, you can consider an investment in the more or less short term according to their deadlines. However, several facts must be taken into account:
In other words, when you are offered a profitable investment in the short term, it is better to be suspicious and try to understand the interrelationships of each investment.
Short-erm speculation on the financial markets, a profitable investment?
More and more brokers (brokers) extol the merits of short-term speculation on the financial markets through youtube videos or targeted advertisements. More often than not, they make you believe that the market is predictable and that you can ride bullish or bearish financial market trends to make profitable short-term investments.
The role of cognitive biases in financial investments
Also called daily trading, these short-term financial methods are attractive since they are based on certain well-known cognitive biases in the universe of behavioral finance such as:
the retrospective bias where the investor rationalizes an unforeseen event a posteriori by estimating that it was foreseeable at the time of its occurrence. For example, it’s like thinking after the fact that you should have bought Bitcoin in 2008 when it was worth a few cents, when it was completely impossible to predict such a craze for the future. This bias can lead to investing and adopting a very risky investment strategy. With hindsight bias, combined with the herd effect (don’t be condescending, that’s the scientific term), the investor takes the investment step to imitate and attempt to replicate the performance of the youtube influencer
anchoring bias where the investor in his attempt to estimate the unknown (predict the future) is based on familiar elements such as the past performance of an asset. However, there is a basic rule in finance: past performance does not presuppose future performance. Thus, an investment on an upward trend can equally likely give way to a lasting downward trend or to a new rise in the financial asset. Impossible to know in advance.
There are many other cognitive biases influencing our investment decisions. If this interests you, we invite you to make David Kahneman ‘s scholarly work your own .
The volatility and efficiency of financial markets
However, daily trading is not a profitable option in the short term due to the high volatility of the financial markets and their unpredictability. Many economists have formalized the efficiency of financial markets by demonstrating that the arbitrages carried out were largely due to chance. Indeed, according to these economists, the market integrates in real time all available information so that the market value reflects the real value of an asset. Thus, your probabilities of losing are almost equivalent to your probabilities of winning, so your mathematical expectation is zero.
Through empirical work, Eugène Fama was able to demonstrate that it was impossible to beat the market (that is to say, to make arbitrages to beat a benchmark index). Profitable short-term investments are then made “over the counter” (over-the-counter), ie outside the financial markets.
To give you proof of the efficiency, you can consult the Morning Stars studies which compare active management funds (those carrying out financial arbitrage) and passive management funds (ETFs or index funds which do not carry out arbitrage and content to keep their financial assets). It shows that only 20% of active management funds manage to offer gross returns higher than the benchmark index fund.