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Investment Time Horizon: Definition And Its Role In Investing


Beginning investors who come to the stock market are inevitably confronted with terminology that is new to them. An accurate understanding of this vocabulary makes it possible to quickly understand the principles of the investment mechanism and learn how to make all necessary calculations without errors. In general, for a beginner investor to start meaningful actions it is enough to assimilate a limited set of the most important concepts, which includes the investment horizon.

Investment Horizon - What Do You Need To Know?

The investment horizon is a multifaceted concept, and authors of publications and books on investing often use it in different ways. It is viewed as an interval of time:

In general, all these points of view are only special cases of the general definition of an investment horizon. It can be formulated as follows. The investment horizon is the time during which an investor plans to invest funds in certain projects and assets, expecting to achieve the set goal at the expense of the profit received. In this case, the notion of "investment of funds" includes the initial investment capital, additional investments, and reinvestment of income.

The investment horizon is one of the fundamental concepts for any investor. It must necessarily be defined (indicated) in your personal investment plan.

How Can You Determine The Investment Horizon?

There are two possible approaches to planning an investment horizon:

In the first case, the goal is formulated as specifically as possible, with an indication of the amount to be received and the terms for achieving it. This option is most suitable for beginning investors, as it allows choosing an investment strategy and defining a set of assets for investments.

A variant of investment planning with this approach looks as follows:

The calculation method of investment horizon planning is used by experienced investors, who can not only formulate an investment goal, but also correctly take into account important factors that affect its achievement:

In this case the stages of compiling a personal investment plan change somewhat:

In general both algorithms do not contradict each other and can be combined. In this case the upper limit of investment horizon is determined during initial goal setting, and its framework is adjusted after assets selection and expected return calculation.

What Investment Horizon Depends On?

A beginning investor should know what factors and how they affect the investment horizon - the length of time in which an investment goal can be achieved. These include:

The choice of assets has the greatest impact on the investment horizon. Their profitability is directly related to the time of investing: the higher it is, the lower the investment horizon.

That is why experienced investors relate the investment horizon to the portfolio structure:

All of the above considerations apply to a limited investment horizon. However, it can also be infinite, for example, when the goal of investments is to receive a permanent basic income. In this case, assets should be selected based on considerations of the right mix of dividend/coupon and speculative income.

Investment Horizon For Beginners

There are no fundamental restrictions on the choice of an investment horizon for beginners. The only recommendation that experienced investors give is not to invest all of the capital in a long-term portfolio. High-quality portfolio formation requires a solid knowledge and experience with assets of different markets and industries.

To accumulate such experience, it is better to allocate part of the funds to short-term (1-3 years) investments. It is advisable to follow all recommendations on the selection of reliable assets and diversification.

#source


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