Your time horizonTime horizon The length of time that you plan to hold an investment before you sell it. This may be a brief period of time or span as long as decades, depending on your financial goals.+ read full definition is the length of time you expect to hold an investmentInvestment An item of value you buy to get income or to grow in value.+ read full definition until you want the money back. Will you need the money you want to investInvest To use money for the purpose of making more money by making an investment. Often involves risk.+ read full definition in a few months, a few years, or a few decades? Your time horizon is a key consideration when choosing investments.
On this page we answer
- How does your time horizon impact your investment goals?
- What is the relationship between risk and your time horizon?
- What investment types are suitable for your time horizon?
- What are examples of time horizons and potential investments?
- What are factors that can affect your time horizon?
How does your time horizon impact your investment goals?
It’s important to think about how long you need to invest, to reach a particular investment goal. Your portfolioPortfolio All the different investments that an individual or organization holds. May include stocks, bonds and mutual funds.+ read full definition can include a mix of investments to help you meet goals with different time horizons.
Investment goals and time
Short-termTerm The period of time that a contract covers. Also, the period of time that an investment pays a set rate of interest.+ read full definition investment goal — saving for a large purchase less than three years away.
Medium-term investment goal — saving for a down paymentDown payment The money you put into buying a large item like a car or home.+ read full definition on a home, which could take several years.
Long-term investment goal — saving for retirement, which could take multiple decades.
What is the relationship between risk and your time horizon?
Your time horizon and the risk of an investment are related. In general, the longer your time horizon, the more risk you can afford. That’s because you have more time to recover if an investment doesn’t perform as expected.
For example, when you land your first full-time job, and start saving for retirement, you could accept more risk. You won’t be retiring for decades, so you won’t need your retirement investment money for a long time. Your lengthy horizon means you could ride out market ups and downs with your investments while you also continue to earn money.
There is always some risk involved in investing. And some investments carry more risk than others. Higher investment risk may be appropriate for your investing goals. A riskier strategy can mean greater volatilityVolatility The rate at which the price of a security increases or decreases for a given set of returns. A stock price that changes quickly and by a lot is more volatile. Volatility can be measured using standard deviation and beta.+ read full definition but over time you may benefitBenefit Money, goods, or services that you get from your workplace or from a government program such as the Canada Pension Plan.+ read full definition from stronger returns.
If you have a short time horizon, and you want the money within a few years, consider adopting a less risky investment strategy.
What investment types are suitable for your time horizon?
Some investment products suit a short time horizon. Other investments fit with a longer time horizon.
Investments like cash and short-term bonds carry relatively little risk for an investor with a short time horizon. For example, if you’re saving for a vacation in two years.
However, cash and short-term bonds can be risky for an investor with a long investment time horizon. For example, if you’re saving for retirement. The low return on short-term investments may not keep pace with inflationInflation A rise in the cost of goods and services over a set period of time. This means a dollar can buy fewer goods over time. In most cases, inflation is measured by the Consumer Price Index.+ read full definition, or be enough to meet your long-term retirement goal.
Learn how not taking enough risk can affect your ability to achieve your goals.
By comparison, investments like stocks can be very risky for an investor with a short time horizon. That’s because their value can change frequently. If you invest in stocks, while saving for a short-term goal like a vacation, you could end up with less money than you originally invested.
Stocks have a higher potential return than cash and bonds over the long term. And stocks can be better suited to investors saving for long-term goals. This is because the stock marketStock market The collection of markets and exchanges where stocks, bonds and other securities are issued or traded.+ read full definition can fluctuate in the short term but tends to perform well over the long term.
Learn more about how the stock market is tracked and how it works.
What are examples of time horizons and potential investments?
Use this table to consider your own investing goals and your time horizon. It can help to review your investing goals with a financial advisor.
|Time horizon||What to keep in mind||Investment optionsOptions An investment that gives you the right to buy or sell it at a set price by a set date. The buy right is termed a “call” option, and the sell right is termed a “put” option. You buy options on a stock exchange.+ read full definition|
|Short: less than five years
|You want your money to grow, but you won’t have time to make back losses if your investments drop in value.
Consider lower-risk investments that are easy to turn into cash.
|Medium: five to 10 years
|You want your money to grow and you know you have a few years before you’ll need it.
Consider investments with more growth potential and a moderate level of risk.
|Long: more than 10 years
|You know you have many years before you’ll need the cash. If you have losses, you have time to make them up. At the same time, this money is important for the future. You likely don’t want to take on too much risk.|
Longer-term investors can allocate a larger portion of their portfolio to higher-risk investments, like stocks, than shorter-term investors. This doesn’t mean that stocks are not risky, but for investors with a long time horizon, stocks are more likely to provide higher returns over the long term.
Even small investments can grow substantially over time. Use this calculator to see how quickly your money could grow.
What are factors that can affect your time horizon
Many different factors can affect your investing time horizon. Where you live, your income and
other assets available to you, such as family support, can determine whether an investment goal is within short reach or many years away. Your time horizon may be influenced by:
Your investment portfolio is only one part of your wealth. Investors also have human capitalHuman capital Human capital is someone’s ability to generate income from work.+ read full definition, which is your ability to generate income from work. Human capital affects the amount of risk you can take when investing.
If your human capital is high, you can afford to take more risk. If your portfolio loses money in the short-term, you have time to recover your losses and the ability to generate more income.
If your human capital is low, you won’t be able to rely on employment income to compensate for potential losses. You can’t afford to take unnecessary risks.
Your human capital depends on a combination of factors that include your age, health, skill set and employment status.
Horizon risk is the risk that your investment time horizon may be unexpectedly shortened. For example, if you lose your job or if the roof of your house needs to be replaced. This may mean you to sell some investments, including those you intended to hold for a long time. If you are forced to sell investments when the markets are down, you are likely to lose money.
To guard against horizon riskHorizon risk The risk that your investment horizon may be shortened because of an unforeseen event. This may force you to sell investments that you were expecting to hold for the long term. If you must sell at a time when the markets are down, you may lose money.+ read full definition, you can include some short-term investments in your portfolio. This emergency fund could be cash in a high-interest savings accountHigh-interest savings account A savings account that pays a higher rate of interest. Some rules apply. Examples: You may have to make a minimum deposit. You may have to do your banking by phone or Internet. You may also have to wait a couple of days to take money out.+ read full definition or short-term bonds. If you find yourself in a situation where you are forced to sell, these investments will limit your losses.
Generally, you should reduce your allocation of longer-term, high risk investments in your portfolio as your investment time horizon shortens. When you get closer to retirement, and need the funds, it’s wiser to avoid the risk of selling investments intended for the long term at a time when the markets are down.
Learn more about different types of investments and how they work.
Your time horizon is a key consideration when choosing investments. It’s the length of time you expect to hold an investment until you want the money back. Considerations to keep in mind include:
- Whether your investing goals are short, medium, or long.
- Your risk tolerance.
- Short-term investing goals may not be ideal for higher risk investments.
- Your time horizon depends on when you started investing in the market.
Consider working with a registered financial advisor who can assess your risk tolerance, help you better understand your time horizon and put together a financial planFinancial plan Your financial plan should cover every aspect of your finances: saving and investing, paying down debt, insurance, taxes, retirement planning and estate planning.+ read full definition for your individual situation.