Loading the player...

What is 'Time Horizon'

Time horizon is 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 or an individual who is investing in a retirement plan. Investment time horizons are determined more by an investor's goals for the funds rather than the mechanism itself.

BREAKING DOWN 'Time Horizon'

Knowing the preferred time horizon is extremely important when it comes to choosing types of investments and an overall asset allocation for a particular portfolio. Longer-term investments can often afford to be more aggressive, as short-term losses can be offset by long-term gains.

For example, most advisors would recommend that the asset allocation of a portfolio for a 30-year-old investor be more heavily weighted in equities than that of someone who is close to retirement age. Age is not the only determinant of time horizon. A 30-year-old investor who wants to save money for a down payment on a house in one year would be investing with a one-year time horizon, even though his 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 for any losses.

Describing the Time Horizon

Generally, short-term investments are considered to have a time horizon of less than three years, while long-term investments are more often designed to be held for 10 or more years. A person may have multiple investments in place to account for different financial goals that result in various time horizons.

Time horizons are most commonly expressed in years. For example, if a 40-year-old person is considering retiring at age 65, the time horizon for retirement planning would be 25 years. Most advisors would recommend a more aggressive portfolio at the beginning of an investment with a time horizon of this length, as it is generally considered long-term investing. As the person approaches age 65, the time horizon shortens, leading many to advise shifts towards a more conservative portfolio.

Time Horizons and Target Date Funds

Target date, or lifecycle, retirement funds are managed based on a predetermined retirement date that functions as the basis for the time horizon that determines asset allocations. As the target date approaches, the fund is automatically reallocated to become more conservative as the time horizon shortens, with some ultimately converting to income funds on reaching the target date.

RELATED TERMS
  1. Investment Horizon

    The total length of time that an investor expects to hold a security ...
  2. Asset Allocation

    Asset allocation is the process of deciding where to put money ...
  3. Portfolio Investment

    A portfolio investment is a passive investment of assets in a ...
  4. Long Term

    Long term refers to the extended period of time that an asset is ...
  5. Growth And Income Fund

    Growth and income funds pursue both capital appreciation and ...
  6. Riding the Yield Curve

    Riding the Yield Curve is a trading strategy that involves buying ...
Related Articles
  1. Financial Advisor

    3 Differences Between Average Joe and Mr. High Net Worth

    Take a look at how income levels and financial circumstances dictate decisions for today's eclectic group of market advisors and investors.
  2. Investing

    Redefining Investor Risk

    Changing the way you think about time and risk can change the way you invest.
  3. Insights

    Investopedia Explains Fractal Markets Theory

    Fractal Market Hypothesis has emerged as an alternative to longstanding economic theories due to its ability to explain investor behavior during crises.
  4. Retirement

    Take Time to Evaluate Your Retirement Plan

    Start the new year off right with a review of your retirement plan, including your risk, time horizon, contributions and income sources.
  5. Financial Advisor

    The 401(k) Emergency Boomers Need to Address Now

    The asset allocations of Baby Boomers’ 401(k)s are dangerously out of balance. Here's how to remedy that.
  6. Retirement

    5 Ways New Investors Can Reduce Stress

    Learn five ways to reduce stress prior to investing, involving budgeting, diversification and risk tolerance.
  7. Financial Advisor

    An Introduction to Asset Allocation

    A portfolio is only as strong as its asset allocation. To create the right one, investors need to determine their risk tolerance, time horizon and goals.
  8. Retirement

    Who Actually Benefits From Target Date Funds?

    This pre-packaged retirement investment option could be the perfect fit for some investors and a downfall for others. Which are you?
  9. Retirement

    Analyzing The Best Retirement Plans And Investment Options

    Understanding the various retirement investments - from annuities to 401(k)s and everything in between - is crucial to reaching your retirement goals. Here, we examined many of the popular investments ...
  10. Retirement

    How to Change Your Retirement Plan

    Retirement is one of those things you plan for but it can't be etched in stone. From asset allocation to risk tolerance, it must change when life happens.
Hot Definitions
  1. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  2. Current Assets

    Current assets is a balance sheet account that represents the value of all assets that can reasonably expected to be converted ...
  3. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  4. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  5. Cost of Debt

    Cost of debt is the effective rate that a company pays on its current debt as part of its capital structure.
  6. Depreciation

    Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life and is used to account ...
Trading Center