DEFINITION: The amount of time one expects to hold an investment. It is most often used to describe the date target when an investor intends to pull a significant amount of money out of the markets, or get out of the market entirely.
Image showing the definition of the term "time horizon" in investing.
Investment time horizon is the amount of time one expects to hold an investment. It is most often used to describe the date target when an investor intends to pull a significant amount of money out of the markets, or get out of the market entirely.
What is a typical time horizon?
Unlike other factors that inform decision-making for investors (such as momentum), time horizon is an entirely personal determination.
Retirement is a moment when many investors choose to pull a significant amount of money out of the markets, but let's not over-simplify that, because:
The traditional retire-at-65 model still works for some, but the FIRE movement (one example) proves that not everyone has the same timescale when it comes to an active work life.
Retirement means different things to different people. You might want to keep your money in the markets until you change careers, or go back to school.
Other major life events—a wedding, buying a house or car—can work just as well when considering your time horizon.
Time horizon and risk
Time horizon and risk share a close relationship. Investors whose time horizons are years or even decades away are able to weather adverse market conditions, because they don’t need to pull cash out of the market anytime soon. Their risk tolerance is generally higher than shorter-term investors.
💡 Longer time horizon = ⬆️ higher risk tolerance
Investors with shorter time horizons—for example, those who are planning to retire in the next few years—have a lower tolerance for risk, because they’re not able to count on building back up from a significant dip.
💡 Shorter time horizon = ⬇️ lower risk tolerance
Alternatives to time horizon
Time horizon, as the name suggests, is measured strictly by time. For example, you might say:
“I’m going to retire in 15 years.”
When that moment comes, you might pull out of the market with whatever you’ve managed to earn in the intervening years. Investors who choose this tactic might have other factors that definitively set their retirement goal at a particular point in time.
Other investors choose to use dollar-value targets instead of time. For example:
“I’m going to retire when my portfolio grows to $1M.”
This strategy entirely removes timing from the equation. The decision to retire is pinned to the value of the portfolio, rather than an arbitrary date in the future.
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