Your investment time horizon is the length of time until you need to sell your investment. This is an important concept when trying to decide what kind of investments you should have in your portfolio. An investor who doesn’t need their money for decades can own a riskier portfolio compared to someone who needs the money next week.
Generally speaking, the investment time horizon can be called short, medium and long. Here are some very rough definitions of those time horizons and associated risk levels. Keep in mind that these are very arbitrary and the definitions are not standard.
- Short term – Less than 3 years. This investor cannot take any chances with their money and must invest it in guaranteed securities such as a high-interest savings account or certificates of deposit.
- Medium term – 3 years to 10 years. This type of investment can be a conservative mix of stocks and bonds ie 70% bonds and 30% stocks.
- Long term – Longer than 10 years. This time horizon can include most risky investments although one must keep in mind that equities can have very long periods of low returns so it is advisable to have a component of fixed income. Ie 75% stocks and 25% bonds. This ratio can be adjusted if necessary to allow you to sleep at night.
Your horizon is always getting closer
Remember that your investment time horizon is always changing. If you have $10,000 invested that you need in 16 years then you might invest in a 60% stocks, 40% bonds mix. After 9 years have elapsed then there will be only 7 years remaining in the time horizon so it would be advisable to increase the bond portion and decrease the stocks portion.