Why You Should Know Your Investment Time Horizon

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What is your Investment Horizon?


1) An investment horizon is a frequent section on investment questionnaires and forms that I want to break down for you guys.

Anytime you open an investment account or a bank account, you'll be asked the question:

b) Do you have a short-term or long-term investment horizon?

While your answer could be 4 years, 5 years, 10 years or more, the actual concept of investment time horizon is very important for the purposes of drawing out your assets and determining what your exposure to equities should and could be.


2) Therefore, the first step to determine your risk tolerance is assessing your ability to stomach movement in the market.

Are you losing sleep at night?

Are you stressing over a market correction?


3) Another important factor is deciding whether you need your money in 6 months, 1 year, 2 years, 10 years or only at retirement. This will have a significant impact on your investment strategy.

Why?


4) Because who knows what will happen in the stock market in the short term. If we see a 20% correction in the market, that couple might no longer be able to use that 50K for a down payment.

Consequently, the time horizon question becomes more relevant for them, as they most probably will use that money in the short term.

Accordingly, individuals either have a short, a medium or a long-term investment horizon.


5) RESPs (Registered Education Savings Plan) and how it applies with the topic of investment time horizon

-Let’s pretend you have a couple kids at home. They’re 3, 4, 5 and/or 6 years old. When it comes to their RESPs, think of your investment horizon for this specific investment account (RESP) as these kids grow and before they turn 18.

If you have a 5 year old, he/she will start using his RESP at 18 years old so that gives you a 13 year investment horizon.
Therefore, you could own equities in that portfolio and over time, you could consider reducing the equity ratio in the portfolio as those cycles can generally be anywhere from 3 to 7 years.

The closer you get to the lower end of those years, the more you want to move towards some fixed income and some more defensive strategies.


6) Over time, you should reduce your allocation of longer-term investments as you near the end of your investment time horizon. The team and I would welcome the opportunity to discuss what is best for your specific situation.


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