We’ve been looking at how to create a balanced investment portfolio that is custom built for your specific needs. A balanced portfolio is made up of a variety of assets which are chosen based on a number of factors including risk tolerance, age, time horizons, and goals. Today we will be focusing on time horizons and how they affect which assets are chosen for your portfolio.
What Is a Time Horizon?
A time horizon is the length of time an investment is made or held before it is liquidated. Although time horizons can be as short as seconds in the case of a day trader, they are most commonly expressed in years. Some can even be decades for a buy-and-hold investor or an individual who is investing in a retirement plan.
Most often, short-term investments have a time horizon of less than three years. Meanwhile, long-term investments are usually held for 10 or more years.
Which Factors Determine the Time Horizon?
The main answer to this question is: what do you want and when do you want it?
This where the importance of setting your financial goals comes in. You probably already know what those are, or you wouldn’t be reading our blog.
But if you don’t already have financial goals in place, take a moment to consider what you want and how you want your money to work for you.
Afterwards, consider how long it would take for you to meet these goals— or how long you have before you need to meet these goals. These will likely fall into time periods that could be short-term or long-term. However, they could also be a mix of both.
The nature of your financial goal will determine your time horizon.
For example, if a 35-year-old person is considering retirement at age 65, the time horizon for retirement planning would be 30 years. This time horizon would be a long-term investment. And since short-term losses can be offset by long-term gains, most advisors would recommend starting out with an aggressive portfolio (meaning bigger returns but with higher risk).
Then as the years and decades pass and the time horizon shortens, advisors would suggest adjusting the asset allocation to create a more conservative portfolio.
Because long-term retirement planning is common, target date, or lifecycle, retirement funds have been created to address this need. They are managed based on a predetermined retirement date that functions as the time horizon.
This horizon, in turn, determines asset allocations. As the target date approaches and the time horizon shortens, the funds can automatically become more conservative. Some funds could even convert to income funds on reaching the target date.
Of course, not all financial goals are long-term. If yours is a short-term goal, like saving up for the car you’ve dreamed of owning, or taking your family on their dream vacation, then this will affect your decisions about what types of assets to include in your portfolio — and which ones not to include.
Investing conservatively over short time frames would be prudent since there is little time to make up for any losses. More conservative choices that limit risk like CD’s or Money Markets would be appropriate choices for these types of goals.
Life Is Messy
Life can also present more complicated investment situations — many of us have multiple financial goals that require multiple investments to be in place that have various time horizons.
Managing your wealth may seem overwhelming, but it doesn’t have to be. We have the knowledge and resources to support you in moving in the right direction with your portfolio and meeting your financial goals— short-term, long term, or a mix of both.
Our team at Saddock Wealth knows that high net worth families have complex financial needs. We will assemble and coordinate the best options for your family’s unique situation and work exclusively in your best interests.
To learn more about the portfolio construction process and our approach, schedule a call with us!