Investment Time Horizon

What Is an Investment Time Horizon?

An investment time horizon, or just time horizon, is the period of time one hopes to hold an investment until they need the money back. Time horizons are largely directed by investment goals and strategies. For instance, saving for a down payment on a house, for perhaps two years, would be viewed as a short-term time horizon, while saving for college would be a medium-term time horizon, and investing for retirement, a long-term time horizon.

Understanding Investment Time Horizons

An investment time horizon is the time span where one hopes to hold an investment for a specific goal. Investments are generally broken down into two principal categories: stocks (riskier) and bonds (safer). The longer the time horizon, the more aggressive, or riskier, a portfolio an investor can build. The shorter the time horizon, the more conservative, or safer, the portfolio the investor might need to embrace.

Short-Term Investment Horizon

The short-term horizon alludes to investments that are expected to last for less than five years. These investments are proper for investors who are moving toward retirement or who might require a large sum of cash soon. Money market funds, savings accounts, certificates of deposit, and short-term bonds are great decisions for short-term investments since they can undoubtedly be liquidated for cash.

Medium-Term Investment Horizon

Medium-term investments are those which one hopes to hold for three to a decade, for example, by individuals saving for college, marriage, or a first home. Medium-term investment strategies tend to balance among high-and okay assets, so a mix of stocks and bonds would be a suitable method for safeguarding your wealth without losing value to inflation.

Long-Term Investment Horizon

The long-term investment horizon is for investments that one hopes to hold for ten or twenty years, or even longer. The most common long-term investments are retirement savings. Long-term investors are ordinarily able to face greater challenges, in exchange for greater rewards.

Tip

Generally talking, the longer your investment horizon, the more aggressive you can be in picking your investments.

Illustration of an Investment Time Horizon

Suppose two individuals wed, and keeping in mind that they live in the city presently, they'd eventually prefer to move out to suburbia in a couple of years. In any case, they don't have the money for a down payment on a house, so they'll have to fire saving up. That is a short-term investment horizon, so they'll presumably need to go with something moderately conservative, similar to a money market fund, to stay away from any sharp swings in stocks.

Meanwhile, they've both exploited their employers' 401(k) savings funds (an employer-sponsored retirement fund, now and again with employer matching). Furthermore, since they're both youthful, that is a long-term time horizon. Given the timeframe until their retirement, they can stand to be extremely aggressive in their asset allocation, upwards of 90% of stocks, as the long investment horizon ought to permit their portfolio to recuperate from any short-term downturns.

Next, a baby goes along! Presently they need to begin contemplating saving for college. That is all the more a medium-or long-term goal, so they can be really aggressive in the beginning and afterward turn somewhat more conservative as high school graduation for the child goes along. Yet, there is a government saving plan (529) that permits your contributions to develop tax-free, for however long they're utilized for educational expenses.

Investment Horizon and Risk

Each type of investment conveys different forms of risk, which ought to be figured into your investment strategy. Businesses can fail, borrowers can default, and, surprisingly, sound investments can be weak in a market downturn. Below, we'll frame a few forms of risk and their effects on each type of investment.

Inflationary Risk

Inflationary risk alludes to the peril that the real value of an investment will fall, due to an unexpected increase in consumer prices. Bonds are especially vulnerable to inflation, since coupon rates are ordinarily fixed; an unexpected spike in inflation could dissolve any expected gains from the investment. Be that as it may, it is feasible to ameliorate inflationary risk to bonds through Treasury Inflation-Protected Securities.

Interest Rate Risk

Interest rate risk is the peril that an unexpected rise in interest rates could consume a portion of the gains of an investment. Like inflationary risk, this is ordinarily a concern for fixed-income securities, similar to bonds. This risk can be reduced by holding bonds of various spans, or investing in interest rate derivatives.

Business Risk

Business risk alludes to the peril that a company could fail or fail, creating any stocks or bonds issued by that company to fall in value. While no company is safe to business risk, you can go a long way towards staying away from the riskiest companies via carefully assessing their business plans. You can likewise reduce your exposure to any one business by having a diversified portfolio.

Default Risk

Default risk is the likelihood that a borrower will not be able to repay its obligations. This normally alludes to bond issuers, yet it could likewise allude to other obligation based securities. You can reduce your exposure to default risk by investing in bonds with high credit ratings.

Market Risk

Market risk, or volatility risk, alludes to the chance that the value of an investment could be negatively influenced by speculative behavior, market declines, or other world events. Since markets trend upwards over the long haul, market risk is ordinarily a larger concern for short-and medium-term investment horizons.

Investment Horizon FAQs

What Is an Investment Horizon?

An investment horizon alludes to the timetable wherein an investor plans to gain value on their investment. This can go from a couple of years to several decades.

Why Is an Investment Horizon Important?

The length of an investment horizon will determine what types of investment products are generally suitable for the investor's goals. Ordinarily, investors look for stable assets for short-term investing. Riskier investments are more acceptable on a longer-term investment horizon, since markets overall will quite often trend upwards.

What Is a Medium-Term Investment Horizon?

The medium-term investment horizon normally alludes to investments of five to a decade, for example, individuals saving for a child's college education.

What Does Long-Term Horizon Mean?

The long-term horizon alludes to investments that have a decade or more to collect profits. The most common type of long-term investment is saving for retirement.

What Is the Ideal Investment Horizon?

Since interest builds dramatically, a longer investment horizon can generate a lot greater profits than a short-term investment. To this end it is important to put something aside for retirement early — a small investment presently can generate high returns in the event that it has years and years to develop.

The Bottom Line

Each investor needs to assess their own goals and investment course of events before choosing where to carefully put their money. Savings accounts and CDs might be a helpful place to store money over a shorter period of time, yet will rapidly lose their value to inflation. On the other hand, aggressive investments in the stock market will generate high expected returns over the long haul, however they will stay defenseless to short-term market variances. It falls on every investor to choose the optimal balance of risk and rewards.

Highlights

• Time horizons are periods where investments are held until they are required.
• The longer the time horizon, the longer the power of compounding needs to work.
• Time horizons differ as indicated by the investment goal, short or long.
• Generally talking, the longer the time horizon, the more aggressive an investor can be in their portfolio, and vice versa.
• Time horizons additionally differ as per the time by which you start investing.