Time Horizon
Candlefocus EditorShort-term time horizons are generally considered to be one to five years. Investors with short-term time horizons typically focus on investments that will provide a steady cash flow, such as bonds, CDs, or dividend-paying stocks. Investors with long-term time horizons are focused on growth investments such as stocks, REITs, and real estate. With a long-term time horizon, an investor has more time to hold an investment and wait for the power of compounding to work.
In addition to goal and timeframe, the starting point of investing can have a significant impact on time horizon. For example, an investor who starts at age 20 has a much longer time horizon than an investor who starts at age 50. Generally, the longer the time horizon, the more aggressive an investor can be in terms of investment choices.
Time horizon is also a crucial factor to consider when diversifying a portfolio. Generally, investors who have a longer time horizon are willing to invest in more risky investments, such as small-cap stocks, international stocks, and commodities, because they don't need the money for several years and have time to recover from potential short-term losses. Investors with a shorter time horizon will typically invest in less risky investments to ensure safety of principal.
No matter the investor's goal and starting point, it is important to consider the time horizon of an investment before deciding to buy. Time horizon will determine the types of investments to buy, when to buy, and when to sell in order to reach a specific investment goal. It is important to understand the time horizon to maximize the chances of reaching the desired investment goals and objectives.