Using Time Horizons to Reach Your Investing Goals

When contemplating an investment, "What is your time horizon?" is a common question. The answer can help you decide what type of investment vehicle to consider, which investments to avoid, and how long to hold your investment.

Not only do investment timelines depend on your age and goals, but on current regulations. The SECURE 2.0 Act of 2022 defined the age for required minimum distributions (RMDs) from a retirement account as 73. The age increases to 75 in 2033. If still employed, you can continue to contribute to your traditional IRA account past age 70½, similar to the rules for 401k and Roth accounts.

Risk and Time

Investors often choose aggressive investment vehicles, such as growth stocks, as part of a long-term investment plan for retirement or a child's college expenses. Individuals may participate in employee stock ownership plans or 401(k). Over several decades, biweekly payroll deductions and employer-matching contributions will help the employee build up substantial savings.

Both time and market conditions can hamper long-term savings goals. Throughout an investor's lifetime, the economy will ebb and flow through periods of inflation or recession. The financial services industry has created investment products to help investors match their portfolio holdings to an appropriate timeline. This approach guides investors to avoid poor outcomes associated with inappropriate asset allocation.

Evaluating Time Horizons

Volatility is often a greater risk short term than in the long term. If you have 30 years to reach a goal, such as retirement, a longer horizon will quell frequent market moves.

• Short Term. Short-term goals are those less than five years in the future. With a short-term horizon, if a drop in the market occurs, the date on which the money is needed may be too close for the portfolio to recover from a market drop. Holding funds in cash or liquid vehicles is likely the most appropriate strategy. Money market funds, savings accounts, and short-term certificates of deposit are popular conservative investments.
• Intermediate-Term. Intermediate-term goals are those five to 10 years in the future. Some exposure to stocks and bonds will help grow the initial investment's value, and the amount of time until the money is spent is far enough in the future to permit a degree of volatility. Balanced mutual funds, which include a mix of stocks and bonds, are popular investments for intermediate-term goals.
• Long-Term. Long-term goals are those more than ten years in the future. Over long-term periods, stocks offer greater potential rewards. While they also entail greater risk, there is often sufficient time to recover from market fluctuations.

Investment Choices

• Target-Date Funds are mutual funds that automatically reset the mix of assets, stocks, bonds, and cash, in their portfolios according to a time frame. Frequently used as retirement savings vehicles, these funds revise investments to a conservative strategy as the investor’s retirement date approaches. A target-date fund designed to fund an investor’s retirement 30 years from today might have a mix of investments weighted heavily toward stocks, with a moderate amount of bonds and little cash. At year thirty, the mix may have cash as the largest percentage of the portfolio, followed by a moderate amount of bonds and few stocks.
• College Savings Plans and qualified tuition plans, also known as 529 plans, help investors cover the cost of primary and secondary schools, university and college, vocational school, an apprenticeship education, or cover up to $10,000 in student loans. College savings plans permit investors are commonly invested in a pre-approved list of mutual funds. Many of these funds are age-based funds, which operate similarly to target-date funds. As the child ages and the date on which tuition must be paid approaches, the asset allocation becomes more conservative. Beneficiaries of 529 college savings accounts are permitted to roll over up to $35,000 throughout their lifetime from any 529 accounts to their Roth IRA. These rollovers are subject to Roth IRA annual contribution limits, and the 529 accounts must have been open for more than 15 years
  
• Mutual Funds offer professional investment management, including security selection, and a large variety of choices, making it easy to get a mix of many securities. Balanced funds offer a balance between stocks and bonds in a single fund. 
• Stocks and Bonds can be used to build and manage your portfolio if you have the time, skill, and interest. As time passes, you can adjust your asset allocation in favor of less-aggressive investments.

The Bottom Line

Time horizon investing is about planning. Investment selection is based on the time until your goal is funded. Investors often choose higher-risk or aggressive investments in the short term. However, as the funding date approaches, assets are commonly shifted to more conservative investments to reduce the risk of market fluctuations.