What’s a time horizon?
22 April 2021
There are a few important things to think about when investing. A key one is the length of time you plan to leave your money invested for—also known as a ‘time horizon’. Generally, this has a big impact on the type of things you invest in.
Lower-risk investments don’t usually experience as big gains or losses over time as investments that are higher-risk. This means that you’re less likely to lose as much money in a lower-risk investment over time, but also any gains on your initial investment may not be as large.
If you can handle the greater ups and downs (also known as volatility) from higher-risk growth investments, then over time they tend to outperform other investment types. But if you know you’ll need the money in the next couple of years, then you may want to stick with a lower-risk, conservative investment.
Generally, the longer you can leave your money invested for, the more risk you can take. A good way to illustrate this is to look at a graph of an ASX200 ETF share price. If you had bought a share in this ETF in May 2008, a few months before the Global Financial Crisis, you would have paid $23 for a share that fell to $11 by March of the next year.
But, if you had a long time horizon, that same share would have been worth more than the $23 you invested by 2011—and by 2021, it would be worth almost $40!
None of that would be helpful if you needed your returns by mid-2009. But if you had a long time horizon, and could afford to wait, then it may have been worth it.
(Remember, this isn’t a guarantee—it’s just an example.)
How do I work out my time horizon?
Here are a few rules of thumb that might help when considering your time horizon (but remember, what you choose to invest in is totally up to you):
Short-term—likely to use the money within the next 2–3 years. You might choose to look at ‘conservative’ options like bonds, term deposits or savings accounts.
Medium-term—likely to take your money out in the next 3–10 years. You might choose to look at a mix of medium and higher-risk investments.
Long-term—likely to leave your money invested for over 10 years. You might choose to look at riskier assets such as ‘growth’ stocks as part of your investment strategy.
A key part of all of this is diversification. Higher-risk portfolios tend to grow over time in general, but individual companies can and do shrink or disappear forever. So no matter what your time horizon is, you can still lose a lot of money if you aren’t diversified.
One last thing: before you invest, consider keeping about 3–6 months of rainy day money set aside in an easy-to-access savings account.
One of the other major factors to help decide what you should invest in, is how comfortable you are with risk. Check out our blog post about risk.
Ok, now for the legal bit
Investing involves risk. You aren’t guaranteed to make money, and you might lose the money you start with. We don’t provide personalised advice or recommendations. Any information we provide is general only and current at the time written. You should consider seeking independent legal, financial, taxation or other advice when considering whether an investment is appropriate for your objectives, financial situation or needs.