Introduction
Time horizon often referred to as investment time horizon, is the timeframe over which an investor would stay invested in a scheme. Time horizon is the period after which an investor would pull out their investment.
Generally, investment objectives and strategies decide the investment time horizon. For instance, saving for an exotic vacation is a short-term horizon, while saving for big-ticket expenses such as purchasing a house or children's education and marriage is considered a long-term horizon.
Understanding Time Horizon
Broadly, investments are classified into two major categories, and they are stocks and bonds. Among the two, stocks are considered the riskiest.
Investors with a long-term horizon can go onto building an aggressive portfolio (predominantly with risky instruments). Conservative investors will generally have a short-term investment horizon, and they go onto invest in safer instruments.
Investments in equity front are advisable to be made with a long-term horizon. This is because a long-term horizon allows investors to ride the risk of volatility.
Also, investing in mutual funds with a long-term horizon allows investors to make good profits as they will benefit from the power of compounding. The combination of a long-term horizon with compounding helps a small amount to grow to a considerable sum over time.
More About Time Horizon
Deciding the right time horizon is very crucial and helps in choosing the right investment option. For instance, investing in equity markets with an investment horizon of just two years will not benefit the investor as they are exposed to the risk of volatility and the only way to combat this is staying invested for as long as possible.
For short-term investors, it is always advisable to invest in bonds, which are considered a much safer bet than stocks. Similarly, it is not advisable for individuals, who are about to retire, to invest in stocks as they can suffer losses if they have a short-term investment horizon.
