In the case of investing, time horizon is how long you expect to hold your investments. It goes hand in hand with diversification and compounding, which we’ve addressed in recent weeks’ posts. Understanding your time horizon and investing according to your time horizon are critical to your investing success.
Events tend to drive the investing time horizons in our lives. An event can be anything that would require the use of the funds we’ve invested. Retirement is probably the most common event among all of us. Other events could be buying a home, funding a child’s college education, etc…The further away you are from an event, the longer your time horizon. Your time horizon should play an integral role in your asset allocation. In other words, certain types of investments make more sense for shorter time horizons while other types of investments might make more sense for longer time horizons. If you need your money in the next couple of years and you’re invested 100% in stocks you run the risk of falling short of your goal if there’s a meaningful market correction and not sufficient recovery time.
Understanding your time horizon and planning and investing according to your time horizon will play a critical role in your success from planning to investing to funding which is the end goal in most cases.