How Time Horizons Impact Your Investment Strategy

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Understanding Investing Time Horizons

When evaluating an investment opportunity, it’s crucial to consider various factors, including your planned selling time—also known as your time horizon. Depending on your financial goals and situation, you might have different time horizons for different investments. Here’s what you need to know.

What is an Investment Time Horizon?

An investment time horizon is the period you expect to hold your position before needing the money back. This could be a specific date or a more general timeframe, depending on your goal. Your time horizon will help determine the level of risk you’re willing to take with your portfolio.

For instance, if you’re saving for college, your time horizon will be the month your child starts college. For a 12-year-old, that would be roughly six years. Conversely, if you’re a young professional saving for retirement, you may have a long-term time horizon.

Common Time Horizon Periods

Short-Term Investment Horizon

This typically spans a few years or less. With a short-term horizon, you’ll generally want to invest in relatively safe options like short-term corporate bonds, certificates of deposit (CDs), and Treasury bills.

Medium-Term Investment Horizon

This period usually lasts between three and ten years. For these goals, consider a mix of aggressive and conservative investments, such as stocks, medium-term corporate and government bonds, mutual funds, and exchange-traded funds (ETFs).

Long-Term Investment Horizon

If your investment goal is more than ten years away, you can afford to invest in more aggressive and long-term options. In addition to stocks, mutual funds, and ETFs, consider long-term corporate bonds, real estate, and private equity funds.

How Does an Investment Time Horizon Affect Your Portfolio?

Financial markets often experience short-term volatility. Your time horizon is a key indicator of how much risk you can comfortably take on with your investment portfolio. The longer your time horizon, the more risk you can take without worrying about short-term fluctuations impacting your return. A longer investment horizon also typically means greater potential for your portfolio’s future value.

On the other hand, a short-term investment horizon means you can’t afford to take on much risk. At that point, preventing losses takes priority over accumulating more wealth. If you’re nearing retirement or another important investment goal, focus on low-risk investments that you can easily liquidate and convert to cash.

How to Invest With Time Horizons in Mind

It’s essential to consider your time horizon not only when developing your investment strategy but also as you manage your portfolio. Here are some ways to implement your time horizon throughout the process:

Consider Risks

Each time you evaluate an investment, consider both the return potential and the risks to determine whether it’s a good fit for your goal. Generally, you can afford to take on more risk with long-term time horizons because short-term volatility is less likely to impact your return.

Tailor Your Investment Choices to Your Goals

Your time horizon is unique to your investment goal. If you have multiple goals, make decisions based on the investment horizon for each one.

Reallocate Your Assets Over Time

Asset allocation involves investing in different assets to balance the risk and reward of each type of asset. As you near your time horizon, evaluate your asset allocation and make adjustments, selling off riskier investments and buying lower-risk investments to preserve your gains.

Consider Target-Date Funds

A target-date fund is a mutual fund or ETF with a specific time horizon in mind. Fund managers adjust the fund’s asset allocation over time based on the target date, reducing the fund’s risk over time so you don’t have to. If you want a hands-off investment for retirement or college savings, a target-date fund could be worth considering.

The Bottom Line

When evaluating an investment opportunity, consider various factors, including when you plan to sell the investment and reap the gains. Over time, adjust your portfolio to stay in line with your investment goals.

If you’re feeling overwhelmed with the process, consider consulting with a financial advisor who can provide guidance or even manage your investment portfolio on your behalf.

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