When thinking about your investment time horizon, you first need to think about when you will need access to funds to achieve your financial goals.
What is considered a short-term goal for one person may be a medium- or long-term goal for another person, depending on factors such as their age and personal risk tolerance. Understanding your time horizon can help you stay on track to reach your financial goals.
What is a time horizon?
An investment time horizon refers to how long you plan to hold your investment before you need access to your funds. Keep in mind that your financial goals and preferred investment strategy may affect your time horizon.
“Whether you’re saving for college or a vacation, your time horizon really comes down to determining when you need the money. And the time horizon helps you determine how long your dollars will need to be invested and the appropriate investment mix to achieve your desired financial goal,” says Nicole Birkett-Brunkhorst, Certified Financial Planner and Wealth Planner at US Bank. Private Wealth Management.
Common time horizons
Investment time horizons can generally be divided into three categories: short term, medium term and long term.
Generally, if you need access to your funds in the next few months or years, your time horizon would be considered short term.
A short-term time horizon should be fairly liquid, so consider investing your funds in assets that can be converted into cash, with minimal volatility, such as a money market account, certificate of deposit with a short maturity, or high yield savings account.
For example, suppose you have a goal of saving $2,000 to buy a new laptop before you go to college in two years. If you started putting $82 a month into a money market account that pays 2% interest a year, by the time you start school you’ll have saved a total of $2,006 saving $1,968 and earning an additional $38 in interest, says Birkett-Brunkhorst.
The goal of a short-term time horizon is to invest conservatively enough to protect your initial investment while generating additional income.
A medium-term time horizon typically ranges from five to ten years, depending on your financial goals and individual investment preferences.
Medium-term investments tend to be a mix of conservative and aggressive investments to reduce the risk of total loss of your initial investment. At this point, you can start mixing some low-risk products obligations and treasury bills with actions to diversify your wallet.
Birkett-Brunkhorst gives another example: Say your goal is to buy a home with at least $15,000 down in the next eight years. If you started investing $125/month in an investment account earning an average annual rate of return of 6%, you would have exceeded your goal and saved $15,250 by saving $12,000 and earning a return of $3,250.
The objective of a medium-term time horizon is to start generating more income using a slightly riskier investment strategy, while remaining protect your initial investment. It is important to note that all investments involve some degree of risk, including CD, obligationsAnd actions— if the stock market goes down, your investment may lose value.
Any investment objective with a time horizon of 10 years or more is considered long term.
With a long-term investment, you generally have the ability to withstand short-term market volatility in hopes of achieving long term gains. Initially, you can opt for riskier investments with low liquidity to produce higher returns, then adapt your portfolio later towards more conservative investment strategies to protect your assets before having to access it.
For example, let’s say your financial goal is to expand your home so your parents can move in with you when they withdraw in 15 years. Your contractor provided you with an estimated cost of $60,000 to build the addition. If you have invested $180 of your monthly income in a investment account earn an average annual rate of return of 8% by the time your parents withdrawyou’d have a total of $60,770 by investing $32,400 of your own funds and earning $28,370 in return, says Birkett-Brunkhorst.
Why is it important to know your time horizon?
Understanding your time horizon can help you choose an appropriate investment plan to achieve your financial goals. You can choose to invest more conservatively to protect your funds or invest in higher risk assets. Knowing your time horizon helps you assess whether you have enough time to recover from investment risks if the market goes downsays Nicole Horton, Certified Financial Planner and Senior Private Wealth Advisor at Wells Fargo Advisors.
For example, let’s say you’re saving up for a trip to the Bahamas in two years. Since you know you need to access the funds in the near future, you will avoid placing your funds in a high-risk investment to protect your funds from market volatility. Instead, you can choose to purchase a 52-week contract Treasury bondfor example, which can increase your holiday fund with less risk.
On the other hand, let’s say you want to help your grandson buy his first car when he turns sixteen. Since your time horizon is longer, you can start investing more aggressively by buying actionsfor example, at first to aim for higher returns and then switch to a slightly more conservative strategy as they approach their sixteenth birthday.
That said, it’s important to choose an investment strategy that you’re comfortable with. If you are a risk-averse investor, you can always choose to invest your savings conservatively over a long time horizon. But to achieve your financial goals, you may need to change the amount or frequency of your investments. Consider talking to a trusted investment advisor who can guide you to the right investment strategy for your level of risk tolerance.
How to determine your time horizon
Determining your time horizon starts with determining when you will need access to funds. If you’re saving for a specific event, your time horizon will typically fall into one of three common time periods. From there, you can start estimating how much money you will need to invest to achieve your financial goals in accordance with your investment strategy.
The most important thing to remember when determining your time horizon and sticking to it is to check in on your progress often. Especially when you have multiple investment goals you’re saving for simultaneously, it can be easy to lose track of your goal, which can delay your timeline or reduce the returns you’ll get by your goal’s end date. “You should review your investment strategy and time horizon every year, if not more often,” says Horton.
The take-out sale
Identifying the time horizon of your financial goal can guide you to the right investment strategy to meet your needs. Your individual risk tolerance plays a role in determining your time horizon.
In general, longer-term investments have the ability to withstand market volatility in hopes of securing higher returns, while shorter-term investments should be structured towards more conservative strategies to protect your investment. initial.
“Your risk tolerance should relate not only to how long or short-term your end goal is, but you should also readjust it as you get closer and closer to your end goal,” says Horton.