Time Horizon

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DEFINITION of 'Time Horizon'

The length of time over which an investment is made or held before it is liquidated. Time horizons can range from seconds, in the case of a day trader, all the way up to decades for a buy-and-hold investor. There is no "right" time frame - it depends on the investor's individual objectives.

BREAKING DOWN 'Time Horizon'

Knowing your time horizon is extremely important when it comes to choosing the type of investments you want and your asset allocation. All things being equal, you can afford to be more aggressive with a longer time horizon. For example, most advisors would recommend that the asset allocation of a 30 year old be more heavily weighted in equities than that of someone who is close to retirement.

That said, age isn't the only determinant of time horizon. A 30 year old who is saving money for a down payment on a house in one year would be investing with a one-year time horizon, despite the fact that retirement is years away. Given the short time frame, it would be prudent to invest more conservatively because there is little time to make up any losses.

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