What Is an Investment Time Horizon?

An investment time horizon is the length of time you expect to wait before selling or withdrawing funds from an investment to use the money. In many cases, you set a time horizon based on your own life and needs. For example, if your child is 13, your time horizon for growing college funds is probably five years. You may work with multiple time horizons across investments, with different investments having different goals and varying time horizons.

Time horizons matter because they impact the way you might manage your investments. If you know you only have a few years to work with, you might make different choices than if you plan to hold onto an investment for 20 years. Starting out each investment with your time horizon in mind can help you choose an approach and risk level that’s well suited to your plans.

What Is an Investing Time Horizon?

When you invest money, you may have a particular purpose in mind for how you plan to use the funds later. For example, growing funds for a comfortable retirement is a common investing goal. Other folks might invest with an eye toward their child’s education, buying a home, or something else.

Every family’s short-, medium- and long-term goals may look different from the next. Your definition of what counts as short versus medium may not be the same as your friend’s. The point isn’t to follow a rigid system, but to use time as one factor to inform your investing strategy.

Short term

A short-term time horizon could mean a couple years, or even a matter of months. Some short- term goal examples could include enrolling in classes for a new professional certification or replacing an important appliance at home.

If you only have a few years or less to go, investing in the stock market may be a more high-risk way to go. More volatile investments like individual stocks may have higher growth potential than certain other investments, but they may also have higher risk of losses. There’s a balance between maximizing earning potential on your money and giving yourself wiggle room to recover if the market goes down.

More conservative options may include keeping money in a high-yield savings account or a certificate of deposit (CD) to accrue interest at higher rates than a conventional bank savings account, while avoiding the ups and downs of market performance. Alternatively, you might consider investing in high quality corporate bonds or government bonds (essentially loaning some of your money to a corporation or the government, with interest). It is possible to lose money with bonds, but they are generally considered low-risk investments. Meanwhile, CDs and high-yield savings accounts have extremely low risk if you’re working with an FDIC-insured financial institution.

Medium term

A medium-term time horizon might cover anywhere from 3–10 years. Even experts sometimes disagree on the exact time range (e.g., Does three years truly count as “medium” term, or should that definition start at five years? Is 10 years the benchmark for a long-term investment, or 15?). As you can imagine, this means your medium-term time horizon strategy may look completely different from someone else’s, depending on how much time you’re working with and how you feel about risk.

A medium-term strategy may include finding the balance between aggressive and conservative investments. Some high-risk, high-reward picks may help grow investments faster, while conservative selections may help keep your overall portfolio more steady in the face of market swings. You might shift the balance as your time horizon comes closer. Of course, always keep in mind investing can lead to losses as well as gains, and past market performance is not a guarantee of future returns.

For some people, a balanced mix includes things like stocks, bonds, mutual funds and exchange-traded funds (ETFs).

Long term

A long-term investment time horizon can help give some investors extra flexibility to be more aggressive or daring with your investment choices. If you have 10 or 15 years or even longer before you need your money back, you may have a long time for markets to recover from short- term dips and compound growth to help boost your earning potential.

Stocks, mutual funds and ETFs are just some popular long-term choices. You might also consider long-term bonds, which are more sensitive to interest rates but tend to pay larger amounts of interest.

Just because you’re investing over a long-term time horizon doesn’t mean you have to take big risks. A financial professional can help you assess the pros and cons of a more aggressive or conservative approach.

Why Time Horizons Matter

If you look at how investments perform, they almost never stick to a straight path. Fluctuations are part of investing. That’s why investment experts often advise against trying to “time” the market—it can be extremely difficult to predict the next zigzag up or down.

For example, let’s say you’re investing money to put toward replacing your car in the next five years. If the market’s trending down right when your car finally breaks down, you might not have much option but to sell investments anyway and take the loss. To avoid this, you might take a more conservative approach in how much risk you’re willing to take on. At the same time, the returns from conservative investments like CDs or bonds might not always keep up with inflation. So, these can become risky in their own way over a long time horizon because inflation might eat away at your gains, and you might miss out on greater potential returns from a different investment.

If your goal is to retire in 30 years or so, you have a lot more time to readjust your mix if some investment performs poorly. There’s also more time for other investments to bring significant returns. That said, again, any investment comes with risk, and past performance doesn’t guarantee future returns. Any investment strategy should take your risk tolerance into account. It may also be helpful to discuss plans, and how they may change over time, with a qualified financial professional.

Some investment accounts (such as a 401(k) or a UGMA) may have pre-set options to guide you toward appropriate investments based on your time horizon and risk tolerance. With other accounts, a financial advisor may help you strike the right balance.

Any investment carries risks and potential rewards. Conservative options like bonds can help mitigate some market risk, but could leave you falling behind inflation in the long run. Aggressive options can make it big when it comes to returns, but can also swing more dramatically in a falling market. Your time horizon can be an important measure to decide what level of risk feels appropriate and what strategy can help situate you best.

Fabric exists to help young families master their money. Our articles abide by strict editorial standards.

Information provided is general and educational in nature, is not financial advice, and all products or services discussed may not be offered by Fabric by Gerber Life  (“the Company”). The information is not intended to be, and should not be construed as, legal or tax advice. The Company does not provide legal or tax advice. Consult an attorney or tax advisor regarding your specific legal or tax situation. Laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy, or completeness of this information. Federal and state laws and regulations are complex and are subject to change. The Company makes no warranties with regard to the information or results obtained by its use. The Company disclaims any liability arising out of your use of, or reliance on, the information. The views and opinions of third-party content providers are solely those of the author and not Fabric by Gerber Life.