Investing in dividend-paying stocks is a great way to add a steady...by Ashley Grasse
Your Investing Time Horizon Might Change Your Strategy
Timing is a big deal in investing, but not timing the market based on what you think will happen just around the corner. We’re talking about your investment goals based on when you need the money, aka your time horizon.
Time horizon investing lets you make the most of each asset according to what you want to do with your money and when you want to cash out.
We’ll discuss time horizon investing, how it works, and how to employ it in your financial situation.
What is Time Horizon in Investing?
Time horizon investing is, simply put, how long you plan to hold an asset from the time you buy it to the time you sell it, with goals in mind for using those funds. You have to consider the risk you can handle, your current financial situation, and what you want to do with your money.
You could consult a financial expert to help calculate your investment time horizons. But you can calculate your own time horizons if you have the time.
How to Calculate Your Financial Time Horizon
You have some extra money to invest and want it to grow before a specific time or event. Calculating your investment time horizon is easy. It is when the event hits. For example, if you’re 30 now and saving for retirement at 60, your time horizon is 30 years.
It’s not quite that simple, but that’s the basic concept. Here are some things to consider.
Your Goals Affect Your Horizon and Vice Versa
One of the first things you have to ask yourself is what you want to do with the money. Are you pointing your investments toward buying a car, taking a big vacation, buying a house, or planning on retiring?
All of these goals happen at different times and require unique planning and various types of investments.
What Amount of Risk Can You Take On?
In addition to your goals, you must figure out the risk your investments can handle while remaining on track.
On a short time horizon, market swings will cause you to lose sleep or possibly miss your goal amount. In that case, you’ll want to invest in less risky bonds or high-yield savings.
There are several risk factors to keep in mind:
- Interest rates
- The stability of a company you invested in.
- Bond defaults
Your Current Finances Matter
Of course, your current financial situation is a factor. You want to be able to withstand emergencies. It would be best if you had enough stashed away to keep you from taking your invested money out before you want to.
So, job stability may be a consideration when determining how aggressively to invest and where your actual time horizon falls.
Factors That Push Your Time Horizon Out
Some generalizations ring true. Stocks can be risky in the short term because of market fluctuations, and bonds may not cover inflation in the long run.
What are some of the other factors to take into account when planning your investment strategy?
- Inflation is a variable to consider when you think about the term of your goal. Consider how rising costs will affect your investment throughout the period you have set out.
- There are also interest rates and how they may affect your bonds or loans, such as your home mortgage.
- Having a baby will change your strategy drastically. Where will your family be at the end of your time horizon?
- Remember to take taxes should also be taken into account because the government will want its share of your gains.
Different Investment Time Horizons
There are three primary time horizons to consider. They each require different weights of investing in various types of assets.
Short Term – An Investing 5-Year Horizon
If you are thinking of spending your money within a couple of years or even just a few months, you want to invest in something stable. They include:
- High-yield savings accounts
- Money market accounts
- Certificates of deposit
- Short term bonds
Time Horizon Example | Investing to Buy a Car in 2 Years
Say your car’s warranty is nearing expiration, and you want to trade it in before it becomes a clunker. You’ll need to calculate your cost and monthly savings to hit a two-year goal of buying a newer auto.
Medium Term – Holding for 3 to 10 Years
A medium-term time horizon applies to anything you have a few years to figure out. It calls for a mixture of investment types. They include:
- A balance of high- and low-risk assets
- Medium-aggressive mutual funds
- A mix of stocks and bonds
- And any added accounts from above
Time Horizon Example | Saving for Your Wedding
Love lasts forever, but money may not. You want to set aside time to invest in getting that ring, throwing that bash, and taking a honeymoon trip. Don’t start your new life in the red.
Long Term – 10 Years and Beyond
Most people turn to the stock market for long-term investing in one way or another. Despite how the market dips and soars, experts agree that stocks will typically make money over ten years or more.
Some investments to consider long term include:
- Stocks for stable companies
- 401k / IRA
- Blue chip Mutual Funds
- And any added accounts from above to diversify and mitigate risk.
Time Horizon Example | Retirement Planning
Retirement may seem like a long way off, but the sooner you start saving for it, the better. A 401K plan with your employer is an ideal investment and the most popular with people saving for retirement. Keep in mind that you can’t withdraw 401k money at any time, so you may want other assets to cover you in the shorter term
How Your Time Horizon Affects Your Investing Strategy
Risks, variables, and when to get out are all factored into time horizon investing. Some types of investing are obviously riskier than others.
That’s why you should also devise an exit strategy. If an investment is not performing as planned, you may want to get out early and pick up another asset of the same type.
On the other hand, maybe your investment may have outperformed and caused you to cash in early and acquire something more appropriate for a shorter term.
Stay Up to Date and Reach Your Goals
If you are smart and disciplined with your investments, you can achieve your goals for any time horizon. But you should keep up with those investments to make sure they are on course.
StockMarketEye’s management and tracking tools can help you stay on the path to achieving your goals. You can keep track of all your investments in one place and be certain that your time horizon investing is ensuring a brighter future.