What is a Time Horizon in Investing? (& How to Find Yours)
3 min read
How many years do you have until you hope to retire? Until you want to buy a house? Send your kid off to college? Questions like these are one of the most important in investing. Answering them involves assessing your time horizon.
Let's dig into what a time horizon is in investing, the different types you may have, and why it's important to know yours.
Time horizons in investing, explained
Sometimes, we invest for fun. Other times, we want capital gains to help us achieve a specific goal. Typically, we can associate some time frame to our goals.
For example, you may want to buy a house in 5 years, send your child off to college in 15 years, and retire in 35 years.
All of these are time horizons, or periods of time you expect to hold your money in investments until you're ready to use the cash (aka be liquid).
Why you should know your time horizon for every investment
Every investment you make—even the fun ones—should have an investment time horizon attached.
This is because different investments carry different risks. For example, putting your cash into a high-yield savings account keeps you liquid indefinitely. It also minimizes your returns, so sometimes you want to add money to broad market indexes or specific funds/stocks to see your cash grow more quickly.
However, the stock market is volatile, and it can take time to recover after suffering a crash. We saw this happen in the US stock market and worldwide starting around Feb. 20, 2020. The crash lasted nearly two months.
The 3 broad categories of time horizons
Typically, you can break your goals—and therefore your investment time horizons—into three categories:
Short-term (up to 5 years)
Medium-term (5–15 years)
Long-term (15–40+ years)
Your goals won't be the same as another investor's. However, let's give some examples to show you how you might apply time horizons to your own life.
Short-term goals might include buying a new computer, funding a honeymoon, or paying off your student loans. You want this money liquid, so you may want to use capital gains you've already pocketed or savings account funds.
Take a slightly longer perspective for medium-term goals. For example, you may want to pay for a down payment on a house and prepare to take on a mortgage. For medium-term goals like this, you can invest a bit, but be more conservative. The US stock market took 13 months to recover from a major securities selloff in 2015.
For long-term goals like retirement, you've got plenty of time to readjust your portfolio. You can gradually reduce risk and transition from stocks to bonds to cash over time.
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