Consider the horizon. Have you ever stood outside and watched the sun go down? You wait, and watch, and slowly, beautifully, the sun drops below the horizon and out of view. Watching the sun drift beneath that fixed point in the sky is beautiful and satisfying to watch.
What is a time horizon?
The concept of a horizon is a foundational concept in financial investing as well. Only with investing, we consider a horizon based on time rather than geography. The principle, though, is much the same. You choose a fixed point in time in which to lay your gaze is where the amount of time you have to invest and the amount of money you have to invest intersect.
A time horizon is, at its simplest, the amount of time over which an investment is made before it’s liquidated. A common first question that financial investors ask is: how long do you have before you need to use the money? If the answer is one year, that’s the amount of time you have to allow your money to grow. If you have 30 years, then your time horizon is the same day 30 years in the future. Whatever your time horizon happens to be gives your financial planner the information needed to help formulate the best plan to help your money grow in the amount of time specified.
Why is the concept of time horizon important?
If you only have a short time to invest, say ten years or less, that will drastically change the type of plan your advisor will devise for you. For example, a person who is going to retire in five years and a person who is going to retire in 30 years each has a very different time horizon. The longer the time horizon, the more aggressive your financial plan can be.
If you have 30 years to grow your money, you can not only weather downturns in the market, you can benefit from them. Losing dollars won’t hurt you because you’ll have the time to wait until the market goes back up – as it historically always does – and that money will buy more shares at a now-cheaper rate.
A short time horizon means you need to be more conservative with your money. If you are going to retire in five years, your financial planner will be much more conservative in his or her recommendations. You will not be in a place where you can easily weather fluctuations in the market. Once the market goes down and shares lose value, your portfolio loses value as well and doesn’t have time to recover. It’s better to be conservative when investing for a short time horizon.
How can your time horizon help or hurt?
There is no need to worry if your time horizon is short, though. Even if you only have a few years until retirement, putting those years to work for you will be much better than not creating a financial plan at all. Your financial advisor knows exactly how to help design a plan to maximize every bit of your time horizon.
Age is one of the most common factors in determining a time horizon, but investment goals can also dictate the time needed. Perhaps your investment goal isn’t about retirement, but is instead to save enough money for a down payment on a house, or for college tuition for your child. You might have a time horizon of 2-5 years for the former, and 18 for the latter. In either scenario, your financial planner will recommend a mix of stocks and/or bonds and a mix of low, moderate, or high-risk investments in proportion to your time horizon.
Conclusion
Just like in life, there is no set time horizon or financial plan for anyone. Life is on a continuum with unlimited change. Opportunity presents itself constantly. Regular meetings with your finance professional can help reallocate your investments throughout your time horizon, and perhaps even help you revise your time horizon, if appropriate. The important take-away is to have a sense of how much time you have before you need to use your money, and to feel confident that while a longer time horizon is usually better from an investment standpoint, it’s never too late to start investing.