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Time Horizon

Time Horizon

A time horizon or investment horizon is the total length of time a security is expected to be held by an investor. Setting a time horizon for any investment usually has to do with the goals and aims of the investor. Time horizon types vary, they could be short-term to long-term. Some traders set a longer investment horizon because they have more time to keep their portfolio invested and realise profits or offset the losses incurred. Normally, with a long-term horizon, investors feel more comfortable to take riskier investment decisions and capitalise on market volatility. While with a short-term horizon, as in case of a day trading, investors need to be careful to avoid riskier investments, especially close to maturity, so that they don’t incur significant losses.

BREAKING DOWN 'TIME HORIZON'

It is important to determine your time horizon before deciding what type of assets you should have in your portfolio. If you do not need your money for a long time, for example, decades, you can own a riskier mix of investments compared to a person who needs money within the next few weeks or months.
The majority of advisors would suggest фтaverage 30-year-old investors have an asset allocation of a portfolio more heavily weighted in equities than that of someone close to retirement. But not only the age of investor determines the type of time horizon. For example, a middle-aged investor willing to save money for a down payment on a house in one year would be investing with a one-year time horizon, even though their retirement is years away. If you want a higher return, you’ve got to take on more risk and give up some liquidity. If you want to reduce the risk, you’ve got to accept lower returns. If you want high liquidity, you’ve got to accept lower returns and utilise lower risk to ensure you preserve asset value.
In theory, the time horizon seems to be a simple concept. However, it gets tricky, because the investment horizon can fluctuate based on evolving financial interests or variables, even with respect to an individual.

Describing the Time Horizon

Portfolio managers distinguish short-, medium- and long-term time horizons. Short-term investments are considered to have a time horizon of up to three years. The investor tends to have a low risk tolerance and should invest in guaranteed securities, such as certificates of deposit or high-interest savings accounts. Medium-term investments are made for the period from 3 to 10 years. Investors tend to go for a conservative mix of bonds (70%) and stocks (30%). At the same time, long-term investments are more often designed to be held for 10 or more years. With this type of time horizon, investors typically include a higher percentage of risky investments. It is essential to consider that equities can go through prolonged periods of very little growth. Experts say it is advisable to go for a combination of stocks (75%) and bonds (25%).
Generally, the longer time horizon is, the more a bigger allocation of equities likely becomes appropriate in a benchmark. It doesn’t mean that the time horizon is the only deciding factor, but a key one. It must be considered alongside and in concert with return expectations, cash flow needs other factors as well. But a longer time horizon means investors have more time to grow beyond near-term equity volatility.

Time Horizons and Target Date Funds

Target-date mutual funds are a type of investment mechanism similar to life-cycle funds that are managed based on a predetermined retirement date that functions as a basis for the time horizon that determines asset allocation. Such investments typically start off with a larger percentage of high-risk securities like stocks as part of the fund, and gradually, as the time horizon shortens, are replaced by safer, conservative investment mediums that can reliably produce a more steady income stream, like bonds, as the investor approaches retirement age. The target-date mutual fund has a preset maturation date like a certificate of deposit (CD), when it is assumed that the investor will sell the fund, and they are meant to be essentially management free. Such mutual funds appeal to investors who don't want to spend the time to continually reevaluate the portfolio mix of their investments and change it year by year as they approach retirement age.

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