Investment Horizon

Definition

Investment Horizon refers to the total length of time that an investor expects to hold an investment before redeeming it. It can be as short as a few seconds for day traders or as long as decades for long-term investors. The selected investment horizon can strongly impact the strategy, risk tolerance, and suitable investments for an investor.

Phonetic

The phonetic pronunciation of “Investment Horizon” is /ɪnˈvɛstmənt həˈraɪzən/.

Key Takeaways

Investment Horizon plays a crucial role in developing an investment strategy and making investment decisions. Here are three main takeaways about Investment Horizon.

1. Definition: Investment Horizon refers to the total length of time that an investor expects to hold a security or a portfolio. It is a crucial component in deciding the investment strategy as it impacts the risk tolerance and investment goals.
2. Risk Tolerance and Investment Horizon: The duration of the investment horizon typically correlates with the risk tolerance of an investor. For instance, someone with a longer investment horizon may be more willing to take on riskier investments because they have more time to recover from any potential losses. On the other hand, someone with a short investment horizon would likely prefer less risky investments.
3. Investment Horizon and Performance: The performance of an investment portfolio is also usually linked to the investment horizon. For example, long-term investments might perform poorly in the short term but are expected to deliver better returns over the long term. The investment horizon helps the investors to stay committed to their investment strategy and not react to short term market volatility.

Importance

The term Investment Horizon is crucial in business and finance because it plays a key role in shaping an investor’s strategy, risk tolerance, and investment choices. It refers to the length of time an investor plans to hold an investment before selling it. An individual’s investment horizon can range from short-term (weeks or months) to long-term (decades), and is typically dictated by their financial goals, risk tolerance, and investment objectives. The importance lies in the fact that different investment horizons require different investment strategies; a shorter horizon may require more liquid and less volatile investments, while a longer horizon usually allows for more risk and potentially higher return investments. Understanding one’s investment horizon allows for better planning and asset allocation, helping investors achieve their financial goals.

Explanation

Investment Horizon is an important concept that guides an investor’s strategy and decision making process. It essentially refers to the total length of time that an investor expects to hold an investment before liquidating it. The primary purpose of identifying an investment horizon is to align an individual’s investment decisions with their financial goals and risk tolerance. Regardless of whether they are saving for a house, their retirement, children’s education, or any other financial goal, the investment horizon can change the composition of their portfolio and hence influence the risk and return profile.The longevity of an investment horizon can have a significant impact on the choice of investment vehicles. For instance, a longer investment horizon often allows investors to take on more risk for potentially higher returns because they have more time to recover from any short-term losses. For a shorter horizon, more conservative investments might be suitable to reduce risk of capital loss. Overall, knowing one’s investment horizon is crucial as it can help in the selection of appropriate investments and the balancing of the risk-return tradeoff.

Examples

1. Retirement Savings: Most individuals save money for their retirement years throughout their working life. This involves long-term investment which can span over 30-40 years or even more depending on the age of the individual. This serves as an example of a long investment horizon where the person makes continual investments with the goal of retiring comfortably.2. College Savings Plan: Parents often start saving for their child’s higher education right from their birth or early years. This is an intermediate-term investment horizon that could span anywhere from 10 to 20 years until the child is ready for college. Various savings schemes and funds are utilized for this kind of investment.3. Emergency Fund: This is an example of a short-term investment horizon. Many financial advisors suggest maintaining an emergency fund worth 3-6 months of one’s income. This money is often kept in a liquid state, such as in a savings account or short-term bonds, and can be quickly accessed when needed. This fund need not necessarily grow, but it should be protected from inflation, so some may choose to invest it in short-term investment vehicles.

Frequently Asked Questions(FAQ)

Related Finance Terms

• Asset Allocation
• Risk Tolerance
• Time Horizon
• Portfolio Diversification
• Return on Investment

Sources for More Information

• Investopedia
• Fidelity
• The Motley Fool
• Corporate Finance Institute