What is Your Investment Horizon?

 If you're like most people, thinking about time is not easy.  In the US, things are old if they are 2 or 3 hundred years old.  Go to Europe and tourists marvel at sites thousands of years old.  The 30-year-old finds it hard to imagine his or her 65th birthday.  It is a challenge thinking about retirement. "That's far off, I have plenty of time to get started later."  This, of course, gets investment people to wring their hands and gnash their teeth.

We realize that time is the investor's big ally.  Even a small difference in return over a long period can make a huge difference.  An 8% return on $10,000 compounded over 40 years gives you $217,245.  Increase the return by 1% and the ending value is $314,094.  Our mantra is "get invested early and correctly."  Warren Buffett is the shining example of this.  Fifty years ago, he was investing in well-run companies and holding on to them.

The time frame is referred to as investment horizon.  Understanding and thinking about your  investment horizon is an important piece to determining an appropriate asset allocation.  Other things being equal, the longer your investment horizon the greater the tolerance for volatility and, therefore, the greater the capacity to take on stocks.  In layman's terms, the longer your investment horizon the more time you have to recover from a market downturn.

Most people have a longer investment horizon than they think when it comes to retirement planning. For example, many people think right-off-the-bat that the investment horizon is the expected retirement date.  And it is, if you think you might drop dead on that date!  Otherwise, you probably want to continue to have your assets earning a decent return.  In fact, you may need them to continue earning a decent return for 30 or more years.

Another consideration is that you may have as a goal to leave an inheritance.  Now the horizon shifts from how long you are going to live to the life expectancy of your heirs.

The bottom line is that your investment horizon is probably longer than you think!  As a caveat, keep in mind the rule of thumb of investing very cautiously for monies you will need within 5 years.  For example, if you are saving for a down payment on a house, your horizon is probably less than 5 years. Keep these funds in very short-term bond funds or money market equivalents.