Choosing an Investment Strategy Based on Time Horizon
Investment time horizons (the length of time before you plan to cash-in on your investment) can be generally divided into three groups: short, medium and long-term timeframes. It is important for an investor, in the course of their planning to understand when they will need their money as their time horizon will impact their investment strategy and risk tolerance.
All things being equal, an investor looking at a longer timeframe before needing their money can be more aggressive in their investment choices than someone who will need their money sooner- someone coming close to retirement, for example. Of course, age is not the only determining factor for time horizon. A young person who is saving for a down payment on a house may have a short-term time horizon and should choose their investments and plan for risk-tolerance accordingly.
The following summarizes the different timeframes and strategies:
Short-term Investments: This timeframe is often defined as less than 3 years, and may not be well-suited for stocks, real estate or other types of investments that include a high level of volatility and significant risk to the principal invested. Shorter-term bond funds and certificates of deposit are often cited as good choices for short-term investors.
Medium-term Investments: The timeframe for this type of investment might be in the 3-10 year range. Investments looking at this time horizon might consider low-risk, intermediate-term bonds or a well-diversified mix of stocks and bonds weighted heavily toward low-risk bonds- 70% of more of the portfolio.
Long-term Investments: This is a ten-year plus time horizon that enables the investor, if they so choose, to seek potentially higher returns by assuming more risk. Stocks, real estate can provide the greatest return, provided the investor is comfortable with the risk involved. The portfolio mix for the longer-term investor can be about 75% stocks and 25% bonds. Of course, this ratio can be adjusted over time.
Most Important: Preservation of Your Capital
It should be emphasized that the idea behind matching your investment strategy to your investment time horizon is to provide you with your best opportunity for investment returns while, more importantly, ensuring that your required amount of money will be there for you when you need it.
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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.
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