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Definition of horizon time investment

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What is the horizon of time investment?

The horizon of time investment, or only the horizon of time, is the expected period to invest until they need the money back. Investment goals and strategies largely determine the time horizon. For example, saving down payment at home, perhaps for two years, will be considered a short-term horizon, while saving for the lecture will be the horizon of the medium-term time, and investing for retirement, the long-term time of the horizon.

Takeaways key

A time horizon is a period in which investment is held until needed.
The time horizon varies according to investment objectives, short or long.
The time horizon also varies according to the time you start investing.
The longer the horizon of time, the longer the power of the compounding must work.
In general, the longer the horizon of time, the more aggressive an investor is in their portfolio, and vice versa.

Understand the horizon of investment time

The investment time horizon is a period in which people expect to have an investment for a specific purpose. Investments are generally broken down into two main categories: stocks (risk) and bonds (less risky). The longer the time horizon, the more aggressive, or more risky, the portfolio that an investor can build. The shorter the horizon of time, the more conservative, or less risky, the portfolio that investors might want to adopt.

Short-term investment horizon

Short-term horizon refers to investments that are expected to last for less than five years. This investment is suitable for investors who are close to retirement or who may require a large amount of cash in the near future. Money market funds, savings accounts, deposit certificates, and short-term bonds are good choices for short-term investment because they can be easily liquidated for cash.

Medium-term investment horizon

Medium-term investment is expected to be held for three to ten years, such as people who save for college, marriage, or first home. The medium-term investment strategy tends to balance between high and low-risk assets so that a mixture of shares and bonds will be a suitable way to protect your wealth without losing value due to inflation.

Long-term investment horizon

Long-term investment horizons are for investments that are expected to be held for ten or twenty years, or even longer. The most common long-term investment is pension savings. Long-term investors are usually willing to take a greater risk, in return for greater prizes.

Tip

In general, the longer your investment horizon, the more aggressive you are in choosing your investment.

Example of an investment time horizon

Say two people get married, and while they live in the city now, they finally want to move to the suburbs in a few years. But they don’t have money for a down payment at home, so they have to start saving. It is a short-term investment horizon, so they might want to use something relatively conservative, such as money market funds, to avoid sharp swings in stocks.

Meanwhile, they both use their employers’ 401 (K) savings fund (pension funds sponsored by employers, sometimes by matching the employer). And because they are both young, it is a long-term horizon. Given the length of time until their retirement, they are able to become very aggressive in their asset allocation, more than 90% of shares, because long investment horizons must allow their portfolios to recover from the short-term decline.

Next, a baby comes! Now they must start thinking about saving for college. That is more a medium or long-term goal, so they can be very aggressive at first and then become a little more conservative when high school graduation for children comes. But there is a government savings plan (529) that allows your contribution to grow tax-free, as long as they are used for education costs.

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