Time horizon

Time horizon is a key investing concept that any investors should know. It's basically asking yourself “how much time do I have before I need this money?”. The answer varies from person to person - it could be 2, 5, 10, or 20-plus years but will mostly depend on your investment goals. Your investment goals may change over time as well but understanding your time horizon for each investment goal can help you plan your next investment decision. Let’s see how time horizon can affect three separate scenarios and investment goals.

Buying a car

Suppose you’re planning to buy a car in two years, this means you have a two year time horizon to save and invest until you need those funds. In this time frame, you may not have a lot of flexibility to recover from any investment losses if the markets drop unexpectedly. Typically, if you have a short-term time horizon, a conservative approach may be an option. This means investing in low volatility (prices going up and down infrequently) assets such as bonds, other fixed-income assets, or savings accounts. These can offer some security against market changes while still providing returns.

Paying for a home down payment

After buying a car, you want to start saving for a condo down payment in 5 years. If you have 5 years to invest for a home down payment, you may still look at investing in low volatility assets such as bonds or other fixed income securities to offer some protection in market downturns. You may allocate a small portion of your portfolio to high volatility assets, such as stocks or equity-based ETFs, but it will entirely depend on your risk tolerance. On the other hand, if you invest your money in high volatility assets, such as stocks, and in the 3rd or 4th year the market drops, you may have to accept lower than anticipated returns, especially if the market takes longer to recover.

Saving for retirement

Meanwhile, you’re also planning to save and invest for your retirement. If you’re 35 years old and plan to retire at 60, you have a 25 year time horizon. This means you have many years to invest. This long time frame also gives you the luxury to hold investments through the ups and downs of the market. You may use your TFSA or RRSP to do this and may benefit from investing in high volatility assets like stocks or ETFs as they can potentially offer higher returns in the long run. Likewise, you could pair your investments with low volatility assets such as bonds and other fixed-income assets to have a more balanced portfolio.

It is important to note that there’s no one-size-fits-it-all approach to this as everyone’s needs, goals and risk-tolerance are different. However, understanding your time horizon for your investment goals will be an important piece of knowledge to help you decide the right investment options for you.