DEFINITION:
Time horizon is the length of time you expect to hold an investment before needing to access the funds, often linked to specific financial goals such as retirement, education, or major purchases.
When & Why It’s Used:
Time horizon is used to determine the appropriate mix of investments based on the duration until funds are required. A longer time horizon typically allows for a higher allocation to growth-oriented assets like equities, which may be more volatile in the short term but offer higher potential returns over time. Conversely, a shorter time horizon calls for more conservative investments to preserve capital.
IMPORTANCE IN COMMUNICATION:
Discussing your time horizon with your advisor ensures that your investment strategy matches your future financial needs. It allows you to understand why certain assets are recommended and how long-term versus short-term risks are managed. Clear dialogue on this topic builds a shared vision for achieving your financial goals within the desired timeframe.
Additionally, knowing your time horizon helps you ask specific questions about asset allocation, risk management, and performance expectations. This conversation leads to a more tailored investment plan that considers both current market conditions and future cash flow requirements, providing confidence in your long-term strategy.
EXAMPLES IN CONVERSATION:
“What is my recommended asset allocation given my 20-year time horizon for retirement?”
“How do we adjust my investment strategy if my time horizon changes due to new financial goals?”