One important variable in financial planning is the investor’s Investment Time Horizon. Proper understanding of this variable will help you avoid making the “one size fits all” mistake. How can an investor decide whether or not an investment is suitable for his or her investment time horizon? Here are some examples. The longer the time horizon, the higher the risk. A shorter time horizon is more appropriate for those who want to accumulate wealth over a short period of time.
Risk tolerance is closely related to investor time horizon. Investors with a shorter time horizon will not have as much time to recover losses. Conversely, investors with a longer time horizon may be more willing to take risks on higher risk investments. Investment time horizons should be chosen in accordance with an investor’s risk tolerance and the amount of money he or she is willing to risk. The longer an investor’s time horizon, the higher the risk tolerance.
For long-term goals, the Investment Time Horizon should be set at least 30 years. For example, an investor who starts investing at age 25 and plans to retire at age 65 has an Investment Time Horizon of 40 years. On the other hand, if the investor starts investing at age 35, they have only 35 years to create the retirement income they need. There are three different types of investment time horizons: short-term, medium-term, and long-term. A short-term time horizon is ideal for individuals who plan to meet financial goals within five years.
A short-term investor might be looking to save for a down payment on a home in two years. A medium-term investor might be planning to invest for children’s college expenses, while a long-term investor might be aiming to save for retirement. The investment time horizon can vary depending on many factors, including the investor’s age and progress towards his or her goal. So, a short-term investor might want to invest in a more risky asset.
Choosing the Investment Time Horizon based on your financial goals is essential to achieving your financial objectives. The shorter your Investment Time Horizon, the more conservative your investments should be. Short-term investments, on the other hand, need to be liquid, so that you can withdraw them easily in case of emergency. The loss of an investment will affect your short-term financial goals. Some popular short-term investments are cash, certificates of deposit, and savings accounts.
Using a tool that calculates Investment Time Horizon for multiple investment accounts is helpful if you have more than one goal. Otherwise, you may need to calculate the time horizon for each purpose separately. If you have multiple goals, you can use a multipurpose account, but that will require calculating the time horizon for each individual purpose manually. Then, you can weight these goals to get a more accurate picture of how long your funds will last.