Time Horizon
Definition
Time horizon is the expected length of time until an investment goal is reached or funds are needed, which determines appropriate investment strategies.
Explanation
Time horizon is a critical factor in investment planning. Longer horizons allow for more aggressive investments (like stocks) because there is more time to recover from market downturns. Short horizons (under 3 years) typically require conservative investments like cash or bonds.
Your investment strategy should align with your time horizon. Retirement at age 65 with a 30-year time horizon can tolerate more risk than saving for a down payment in 2 years.
Example
A 25-year-old saving for retirement at 65 has a 40-year horizon and can invest 80-90% in stocks. Saving for a home in 3 years requires cash or bonds.