Understanding Why Your Time Horizon Matters

Time horizons breakdown 

Investment time horizons are categorized into three types: short-term, medium-term and long-term.

Short-term (less than 3 years)

• Examples: Emergency fund, a vacation or a small home renovation.
• Investment strategy: Low risk investment products with lower potential returns, as there’s little time to recover from market downturns.
  

Medium-term (3 - 10 years)

• Examples: A down payment for a house or the purchase of a car.
• Investment strategy: Moderate risk investment products that offer the potential for capital appreciation but also some portfolio stability.
  

Long-term (more than 10 years)

• Examples: Retirement savings or a child’s university education.
• Investment strategy: High risk products with higher potential return, as there’s more time to recover from potential losses.
  

Understanding your time horizon is key to selecting the right strategy to meet your financial goals.  

Time horizon, Risk and Asset Classes  

The relationship between time horizon, risk and asset classes is crucial, as the time horizon determines the level of risk one should take and the type of assets one should invest in. If your time horizon is long, you can afford to take on more risk and invest in riskier asset classes, as there is more time to recover from potential losses. Conversely, with a short the time horizon, you should take less risk and invest in low risk asset classes to minimize potential losses and ensure access to your capital when needed.

Suitable asset classes by time horizon:
- Short term time horizon: High yield savings accounts, certificates of deposits, money market funds, treasury bills and short-term bonds.
- Medium-term time horizon: a balanced mix of stocks and bonds.
- Long-term time time horizon: Stocks, real estate and commodities.

Rationale for higher risk assets as the time horizon increases

See table – Probability of Long-Term Government Bonds Underperforming Stocks 

Even with a time horizon of one month, stocks are more likely to outperform government bonds than underperform. However, when they underperform they are likely to underperform significantly. 
 
See table – Probability of Losing Money while Investing in the S&P 500