What’s an investment horizon?
Economist Zoe Wallis shares what an investment horizon is, and why it’s important to know yours.
Does it matter how long I invest for?
There are a few important things to think about when investing. A key one is the length of time you can leave your money invested for. Generally, this has a big impact on the type of things you invest in.
One example that often catches people in NZ out, is ending up in default ‘conservative’ funds when they sign up for KiwiSaver.
Choosing a conservative fund might be a good outcome if you’re 60 and looking to use that money soon. But if you’re 25, and not looking to use that money for 40 years, you have a longer amount of time to ride the ups and downs of a ‘growth’ fund, which generally achieves a higher return over time.
The same theory applies to your Sharesies investments.
Lower-risk investments don’t usually experience as big gains or losses over time as investments that are higher-risk. This means that you’re less likely to lose as much money in a lower-risk investment over time, but also any gains on your initial investment may not be as large.
If you can handle the greater ups and downs (also known as volatility) from growth assets, then over time they tend to outperform other asset types. But if you know you’ll need the money in the next couple of years, then a conservative investment is probably a better option.
Generally, the longer you can leave the investment before you want to touch the money, the more risk you can take.
How do I work out my investment horizon?
Here are a few rules of thumb that might help with your investment choices:
Short-term—likely to use the money within the next 2–3 years. Look at ‘conservative’ options like bonds, term deposits or savings accounts. If you’re prepared to take some risk then you could invest up to 20% of your money in a ‘balanced’ fund.
Medium-term—likely to take your money out in the next 3–10 years. Look at a mix of ‘balanced’ and ‘growth’ funds. But it’s also still a good idea to keep some (say 20–40%) of your money in bonds or similar assets.
Long-term—likely to leave your money invested for over 10 years. Look mostly at riskier assets such as ‘growth’ stocks, although good to keep a small amount (say 10–20%) in ‘conservative’ assets in case you end up needing to take some money out earlier.
A side note: Before you invest, make sure you keep about 3–6 months of rainy day money set aside in an easy-to-access savings account.
One of the other major factors to help decide what you should invest in, is how comfortable you are with taking risk. If you haven’t already, check out the investor quiz over on Sorted to find out what type of investor you are.
Thanks Zoe! 🙌
Ok, now for the legal bit
Investing involves risk. You aren’t guaranteed to make money, and you might lose the money you start with. We don’t provide personalised advice or recommendations. Any information we provide is general only and current at the time written. You should consider seeking independent legal, financial, taxation or other advice when considering whether an investment is appropriate for your objectives, financial situation or needs.