What Is a Time Horizon? | Financial Terms

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Your time horizon when it comes to investing is really important because the time horizon is really how much time do you have until you need the money, and if I'm retiring in ten years I might have a ten year time horizon. If I'm buying a house in three years and I'm saving for a down payment then maybe I have a three year time horizon, and the reason that is so important is because the investment goals and the investment plan that you follow needs to be appropriate for how much time you have. If I have 20 years until I'm going to retire I can invest a lot more aggressively than someone that is retiring next year because I have twenty years to outlast the ups and downs of the market. If I'm retiring next year I only have a one year time horizon and all my money is in the stock market, and the stocks do poorly, I can be really in a challenge if the stock markets happen to do bad right before I'm going to retire. So making sure you have a clear idea of your time horizon is critical to making your investment decisions. Also make sure every separate investment goal you have has its own time horizon and its own investment plan that you're going to follow. I should not invest the same way for my retirement that might be twenty-that might be five years away, than I should invest for my son or daughters college education that might be five or six years away. Those two goals have very different time horizons and as a result I need to follow separate investment plans that are right for each of those situations.