Why It Helps to Know Your Investment Horizon

Photograph by Menty Jamir

The investment horizon — sometimes called the investor’s time horizon — is a fairly simple concept. It’s essentially the duration for which you intend to hold the investments in your portfolio. Generally, this is based on what life stage you’re at, your financial goals and plan, your capacity for risk-taking, your investment strategy and your financial behaviour — all of which are aspects that also influence the kind of asset class you choose. Each asset class also has its own investment horizon, i.e. the amount of time it would take to yield the returns you expect from it. Usually, the level of risk you’re willing to take with your investments is commensurate to the length of your investment horizon.

So, if you’re in your 20s with a healthy appetite for risk and you hope to buy a house in, say, 15 years, you can afford to wait for the returns you seek, which gives you the flexibility and tolerance required to invest in equity — an investment that generally takes at least three years to deliver the desired rewards, since the companies invested in need to time to grow. If you tend to get anxious about risky investments, a mutual fund might suit you better, since it would be curated by a fund manager as opposed to independently navigating the market. If you have high levels of curiosity, you could even explore trading in derivatives or look out for businesses to invest in — provided you can keep a close eye on these investments and be realistic about your targets. On the other hand, if you’re older and nearing retirement and will soon be in need of liquid funds to manage your expenses, investing in a low-risk debt fund for, say, a six-month period would help meet that requirement while also bringing in some returns.

Overall, there are short-term, medium-term or long-term investment horizons. A short-term horizon means that you intend to hold your investments for less than a year, so your portfolio will likely comprise stable investments that can be liquidated swiftly — think short-term bonds, intra-day trading, liquid funds, certificates of deposits, etc. A medium-term investment horizon implies that you can hold your investments between 1 and 5 years — this could include debt funds, mutual funds, or saving for overseas education or a down payment on a home. If you plan to hold your investments for anywhere between 5 and 10 years or even longer, you have a long-term investment horizon and will probably lean towards investing in real estate or the stock market.

While there is no thumb rule for calculating or measuring your investment horizon as the factors that inform it vary from person to person, a systematic look at your finances — including your asset allocation and financial traits and tendencies — will help you have clarity on your financial goals. Consequently, guidance from certified financial planners and chartered wealth managers can help create a balanced portfolio, and help you decide whether you should be seeking long-term rewards that may involve more risk and higher returns, or short-term gains that are moderate but consistent. 

Your investment horizon — whether it be long or short — is fundamental to building a sustainable financial plan. There are pros to all kinds of investment horizons. A longer investment horizon offers more scope for diversification and flexibility, but it does not eliminate risks. When stock prices fall, you can of course buy more and get higher returns in the long-term — but there is also the possibility that you miss the chance to sell and exit at the right time. With a short-term horizon, you can still aim for high and stable returns, but will likely have to choose from a limited pool of assets, which will usually not include equity or alternative investment options, since you don’t have the flexibility of being able to withstand a price fall. If you have the bandwidth, you can also choose to have a healthy mix of investments in your portfolio — some to meet your short-term financial needs and others to contribute towards long-term well-being.

Regardless of what your investment horizon is, there is merit and wisdom in setting up your portfolio by following the basic principles of financial planning — the patience to wait for rewards without giving in to impulses, the discipline to follow through on these investments and be conscious of where you’re putting your money, and the objectivity to adjust your expectations to your actual needs.