What’s an investment horizon?
An investment horizon (or ‘time horizon’) is the length of time you plan to leave your money invested for. Let’s look at how you can determine an investment horizon, and what you can use it for. 🌅
Working out your investment horizon 🧮
An investment horizon can have a big impact on what you invest in, and investing with one in mind can make it easier to form and stick to an investment strategy. Here are some things you can ask yourself to figure out your investment horizon.
When will I need the money?
Think about what you’re investing towards. Is it a better standard of living when you retire? A wedding you’re planning to have in the next few years? What about a house deposit? You can probably work out when you’ll want to use the money from your investments if you work backwards from your investing goal. From there, it’s easier to know if you’re investing for the short-term (2–3 years), medium-term (3–10 years), or long-term (10+ years).
How many goals am I investing towards?
Maybe you’re investing towards your child’s university fund and your retirement—it’s common to work towards several investing goals with different investment horizons at the same time. In this example, you could choose to have separate portfolios for your goals—like a Kids Account for your child’s uni fund, and your own account for your retirement. Or, you could invest in a range of investments to suit both goals within one Sharesies Portfolio.
Some things to consider 💭
Once you have a good idea of your investment horizon (or investment horizons), you can use it to inform your investing decisions. Here are some other things that are connected to your investment horizon and can be worth keeping in mind when you’re deciding what to invest in.
Your investment horizon can help you work out how much investment risk you might take on. Generally, the longer you can leave your money invested for, the more risk you might take on (if you’re comfortable) as you have longer to ride the ups and downs of the market.
For example, higher-risk investments tend to give the opportunity for higher returns over the long term but are more likely to experience volatility (price fluctuations) in the short term. So, if you know you’ll need the money from your investments relatively soon, you could choose to invest in lower-risk investments (where they’re less likely to fluctuate in value in the short term).
You can also consider how your risk appetite fits with your investment horizon. Say your investment horizon is 40 years, that’s a lot of time to let higher-risk investments ride the ups and downs of the share market, but you might not feel comfortable investing in higher-risk investments—and that’s ok! The thing about a long-term investment horizon is that you have plenty of time to get a feel for investing and can adjust your portfolio as you go.
Regardless of your investment horizon, one way to spread investment risk is through diversifying your portfolio. It’s like the old saying “don’t put all your eggs in one basket”. Basically, by investing across lots of different things, you spread your money around, which means you take less of a hit if one of your investments loses value.
Putting an investment horizon into practice 🎸
So how do all of these concepts fit together in reality? 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. You might choose to look at ‘conservative’ options like bonds, term deposits, or savings accounts.
Medium-term 🪴—likely to take your money out in the next 3–10 years. You might choose to look at a mix of medium and higher-risk investments.
Long-term 🌳—likely to leave your money invested for over 10 years. You might choose to look at riskier assets such as ‘growth’ stocks as part of your investment strategy.
Before you start investing, it’s important to consider your budget, emergency fund, and debt plan. And once you own investments, be sure to check in on them now and then to review their performance and make sure they still align with your investment horizon and goals. 🏁
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.