Why time horizon is key to your investing strategy

As an investor, you likely have several financial goals you’re working toward. Some of them might be short term, like an upcoming vacation or pending home downpayment, while others may stretch further into your future, like your young child’s post-secondary education or your retirement.

But how do you determine the appropriate investment(s) to reach your financial goal? In this article, we’ll cover:

• What is an investing time horizon?
• How does time horizon impact your investments?
• Does my time horizon change?
• What determines the best time horizon for your goals?
• Investing for short-term goals
• Investing for medium-term goals
• Investing for long-term goals
• Don’t forget to monitor your investments

What is an investing time horizon?

Your investing time horizon is how long you expect to hold an investment until you want to use the money. Are you investing for a few months, a few years, or for decades in the future? Your investing time horizon is a key consideration when choosing investments.

Think about how long you’ll be investing to reach each financial goal. Saving up for a big vacation likely has a different time horizon than saving for your child’s education or for your retirement. Your portfolio can include a mix of investments to help you meet goals with different time horizons.

How does time horizon impact your investments?

The reason it’s important to invest according to your time horizon is related to risk and your choice of investment/asset. The longer your time horizon for an investment, usually the more risk you can take on.

All investment types – stocks, bonds, ETFs, mutual funds, etc. – come with some level of risk, especially over the short term. But some investments carry more risk than others. The further out your goal is, the longer your time horizon, and the longer you’ll have to recover from any downward fluctuations in your investments, and also take advantage of the power of compounding.

For example, if you are 35 years old and your goal is to save for retirement at age 65, your investment time horizon is long. So, if you decide to invest in stocks or ETFs, which generally carry more risk than some other common investments, you will have the benefit of time to ride out dips in the stock market.

You may also be investing toward a home purchase in the next year or two. In that case, it might be prudent to avoid higher-risk investments. If your investment value dips just when you need to access your money for your down payment, you’d end up with less money than anticipated. It might be more prudent to invest in assets with lower risk, such as a money market fund, a guaranteed investment certificate (GIC) or a high interest savings account (HISA).

Does my time horizon change?

It’s important to note that an investment time horizon is not static – it does change over time as you get closer to accessing your money.

Here’s an example: A 56-year-old, who plans to retire at age 60, has been investing for retirement for almost 30 years. When they began saving for retirement at age 28, it was for a long-term time horizon, leading them to invest in a variety of higher-risk stocks, ETFs and mutual funds with greater potential for long-term growth.

However, that 56-year-old investor is now only four years from retirement, when they’ll need to access their money. Their retirement nest egg has new goals and new time horizon(s).

The investor will need part of their nest egg to keep growing to sustain them over their 20 to 30 years of retirement, and part of it will have to be used as more immediate income. Their original mix of higher-risk equities, ETFs and mutual funds is likely no longer appropriate for all their needs. Some of their money is still investing for the medium- or long-term, while a portion of it will be accessed in the short term.

What determines the best time horizon for your goals?

Your investment time horizon can vary depending on many factors, including your goals, age, income, marital status, and stage of life. But essentially, the ideal time horizon for your investment boils down to your financial goals and how soon you want to use your money.

Let’s look at how your life stage might affect your time horizon. A 30-year-old might start investing for their retirement, which is likely at least a couple of decades away. Their time horizon is long term because they don’t want to use the money until their retirement. However, a 55-year-old, who is also investing for their retirement, is closer to their retirement age than the 30-year-old investor. Both investors have the same goal – investing for retirement – but their stage in life means that their investing time horizons are very different.

Investing for short-term goals

Financial goals within the next three years are relatively short term in nature. Think about a new homeowner who may have more large expenses in the near term. They may have an appliance to swap out, a roof to repair, or a furnace to replace sooner than expected. It’s important that not all of their savings are held in long-term, higher-risk investments in case they need to access funds unexpectedly. They will lose money if they have to sell an equity investment just when the market has dipped.

Similarly, someone in retirement has a few financial goals to juggle. They want some growth in their investments so their money can last through retirement, but also need to preserve their capital and draw regular income. Therefore, they need to hold a portion of their investments in short-term, lower-risk assets to accommodate ongoing payments or withdrawals.

Because the investing time horizon is short term, it’s important to invest in assets that are lower in risk, including money market funds, savings accounts (including High Interest Saving Accounts), certificates of deposit, guaranteed investment certificates (GICs) and short-term bonds.

Investing for medium-term goals

Financial goals within the next three to 10 years are medium term in nature. You might be investing for your 12-year-old child’s post-secondary education, or putting money aside to buy a home or family cottage. You’ll want to see your investment grow over time but need to balance that potential for growth with possible market volatility.

Because the investing time horizon is medium term, it’s important to take a balanced approach to risk, usually a mix of stocks and bonds, as well as mutual funds and ETFs.

Investing for long-term goals

Financial goals more than 10 years away are long term in nature. For most investors, this is their retirement goal, often decades in the future. But it could also be a young, twenty-something professional just starting out in their career, whose goal is to purchase an investment property before they turn 40. Any investment goal that is more than 10 years in the future benefits from compounding and generally has time to recover from market downturns.

Because the investing time horizon is long term, you may want to focus on higher-risk investments that have greater potential for higher reward. These include stocks, ETFs and equity mutual funds.

Don’t forget to monitor your investments

We’ve seen how important it is to align your investment strategies with the time horizon(s) of your financial goals. Now is a good time to review your current investments to ensure they align to your time horizon and goal(s).

Time horizons can change with the passage of time, and life events can shift our financial goals. While it’s important to choose your investments/assets based on your time horizon, it’s also critical to check in on your investments regularly to ensure that you’re still on track.