Do you know whether you are a short-, medium- or long-term investor? What are the common definitions for these three time horizons? Generally, investment time horizon refers to the length of time for which an investment will be held before it is sold off in exchange for cash (liquidated). Time horizons can range from minutes, in the case of a day trader, all the way up to decades for a buy-and-hold investor. What is the right investment time horizon? Actually, there is no “right” or “wrong” time frame for investment – it all depends on the investor’s investment objectives and goals, and his level of risk tolerance, i.e. how much risk he is willing to take.
Since every investor can define his/her investment time horizon in various ways, let us look at the most common definitions of short, medium and long investment time horizons.
Usually, as a general rule of thumb, investment horizons can be classified as-
- short term – one to three years
- medium term – three to five years
- long term – more than five years
Why you need to know them?
Knowing your time horizon is extremely important because it will help you in your investment planning, such as choosing the suitable investment products, monitoring their performance and most importantly, managing investment risks. All things being equal, you can afford to be more aggressive if you have a long-term investment horizon. For example, a 25-year old who is just starting a career will be able to invest in more volatile or risky investment products, since he will have a longer time frame to make the necessary adjustments should the investment suffer losses. But someone, who is close to retirement, should usually be more conservative and take the less risky route, as he does not have much time to make adjustments if his investment is not performing as expected.
However, age alone should not be the only factor in determining your time horizon. Factors namely risk tolerance, investment objectives, expected return, as well as when you will need the funds or money should also be taken into consideration. For example, a 30-year old is saving money for a house down payment and he plans to buy a house in a year’s time. Given the short time frame, it will be prudent for him to invest more conservatively because he has little time to make up for any possible losses. Due to his short-term goal, he cannot afford to invest in risky products even though he still has a long way to go before retirement.
As an intelligent investor, it is crucial that you consider and determine your investment time horizon before investing. But do not cast it in stone, as it needs to be flexible to cope with situations where your investment does not perform according to your expectations. In such situations, you must always be ready to change your investment time horizon and set it to your advantage.