Your time horizon is the length of time you expect to hold an investment until you want the money back. Will you need the money you want to invest in a few months, a few years, or a few decades? Your time horizon is a key consideration when choosing investments.
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How does your time horizon impact your investment goals?
It’s important to think about how long you need to invest, to reach a particular investment goal. Your portfolio can include a mix of investments to help you meet goals with different time horizons.
Investment goals and time:
- Short-term investment goal — saving for a large purchase less than three years away.
- Medium-term investment goal — saving for a down payment on a home, which could take several years.
- Long-term investment goal — saving for retirement, which could take multiple decades.
What is the relationship between risk and your time horizon?
Your time horizon and the risk of an investment are related. In general, the longer your time horizon, the more risk you can afford. That’s because you have more time to recover if an investment doesn’t perform as expected.
For example, when you land your first full-time job, and start saving for retirement, you could accept more risk. You won’t be retiring for decades, so you won’t need your retirement investment money for a long time. Your lengthy horizon means you could ride out market ups and downs with your investments while you also continue to earn money.
There is always some risk involved in investing. And some investments carry more risk than others. Higher investment risk may be appropriate for your investing goals. A riskier strategy can mean greater volatility but over time you may benefit from stronger returns.
If you have a short time horizon, and you want the money within a few years, consider adopting a less risky investment strategy.
What investment types are suitable for your time horizon?
Some investment products suit a short time horizon. Other investments fit with a longer time horizon.
Investments like cash and short-term bonds carry relatively little risk for an investor with a short time horizon. For example, if you’re saving for a vacation in two years.
However, cash and short-term bonds can be risky for an investor with a long investment time horizon. For example, if you’re saving for retirement. The low return on short-term investments may not keep pace with inflation, or be enough to meet your long-term retirement goal.
Learn how not taking enough risk can affect your ability to achieve your goals.
By comparison, investments like stocks can be very risky for an investor with a short time horizon. That’s because their value can change frequently. If you invest in stocks, while saving for a short-term goal like a vacation, you could end up with less money than you originally invested.
Stocks have a higher potential return than cash and bonds over the long term. And stocks can be better suited to investors saving for long-term goals. This is because the stock market can fluctuate in the short term but tends to perform well over the long term.
Learn more about how the stock market is tracked and how it works.
What are examples of time horizons and potential investments?
Use this table to consider your own investing goals and your time horizon. It can help to review your investing goals with a financial advisor.
| Time horizon | What to keep in mind | Investment options |
|---|---|---|
| Short: less than five years Saving for: car vacation home renovation | You want your money to grow, but you won’t have time to make back losses if your investments drop in value.Consider lower-risk investments that are easy to turn into cash. | High-interest rate savings accounts GICs Savings bonds Money market funds TFSA savings deposit |
| Medium: five to 10 years Saving for:child’s education home down payment | You want your money to grow and you know you have a few years before you’ll need it.Consider investments with more growth potential and a moderate level of risk. | Bonds Stocks Equity mutual funds RESP savings |
| Long: more than 10 years Saving for:retirement a cottage | You know you have many years before you’ll need the cash. If you have losses, you have time to make them up. At the same time, this money is important for the future. You likely don’t want to take on too much risk. | Equity funds including mutual funds, segregated funds and exchange-traded funds (ETFs) Stocks RRSP for retirement saving Whole life insurance |
Longer-term investors can allocate a larger portion of their portfolio to higher-risk investments, like stocks, than shorter-term investors. This doesn’t mean that stocks are not risky, but for investors with a long time horizon, stocks are more likely to provide higher returns over the long term.
Even small investments can grow substantially over time. Use this calculator to see how quickly your money could grow.
What are factors that can affect your time horizon?
Many different factors can affect your investing time horizon. Where you live, your income and other assets available to you, such as family support, can determine whether an investment goal is within short reach or many years away. Your time horizon may be influenced by:
Human capital
Your investment portfolio is only one part of your wealth. Investors also have human capital, which is your ability to generate income from work. Human capital affects the amount of risk you can take when investing.
If your human capital is high, you can afford to take more risk. If your portfolio loses money in the short-term, you have time to recover your losses and the ability to generate more income.
If your human capital is low, you won’t be able to rely on employment income to compensate for potential losses. You can’t afford to take unnecessary risks.
Your human capital depends on a combination of factors that include your age, health, skill set and employment status.
Horizon Risk
Horizon risk is the risk that your investment time horizon may be unexpectedly shortened. For example, if you lose your job or if the roof of your house needs to be replaced. This may mean you to sell some investments, including those you intended to hold for a long time. If you are forced to sell investments when the markets are down, you are likely to lose money.
To guard against horizon risk, you can include some short-term investments in your portfolio. This emergency fund could be cash in a high-interest savings account or short-term bonds. If you find yourself in a situation where you are forced to sell, these investments will limit your losses.
Generally, you should reduce your allocation of longer-term, high risk investments in your portfolio as your investment time horizon shortens. When you get closer to retirement, and need the funds, it’s wiser to avoid the risk of selling investments intended for the long term at a time when the markets are down.
Learn more about different types of investments and how they work.
Summary
Your time horizon is a key consideration when choosing investments. It’s the length of time you expect to hold an investment until you want the money back. Considerations to keep in mind include:
- Whether your investing goals are short, medium, or long.
- Your risk tolerance.
- Short-term investing goals may not be ideal for higher risk investments.
- Your time horizon depends on when you started investing in the market.
Consider working with a registered financial advisor who can assess your risk tolerance, help you better understand your time horizon and put together a financial plan for your individual situation.
