Why time horizon matters when investing - Part 2

In part 1 of this article, published last Sunday, we discussed what a time horizon is and how it should affect the selection of your investments. As a quick recap, the time horizon is the length of time an investor expects to own their investment and can be determined by estimating the length of time it will take to reach a particular financial goal. The less time you have until you will need the invested money, is the more conservatively you should invest, since you are unlikely to have enough time to recoup any losses if they occur. In this continuation, we will be discussing the need to change your strategy as your time horizon reduces.

Quite often, Investors put their money into an aggressive investment, such as growth stocks, and then keep it there indefinitely. This is not a smart move. An investment may be a good choice for you at the time it was purchased but it can become less and less appropriate as time passes and your time horizon reduces.

As the date you will need the funds approaches, it is prudent to adjust your portfolio. Assets should be shifted to more conservative investments to reduce the risk of market-related losses derailing your strategy. For example, as you near retirement age you should shift your portfolio from equities to the relative stability of high-quality bonds.

Imagine if you started investing for your retirement in your twenties. At that age, you would likely have been advised to invest in stocks given your long-time horizon. For years, a bull market reigns, and the balance grows and so you make no adjustments to your portfolio. Then, just as you are about to retire, a decline in the stock market wipes out a substantial portion of your nest egg!

Another example would be if you had been investing for 6 years to purchase a home and now have the required amount for a deposit. At the point when you have started actively looking to make a purchase, it would be best to move your invested funds into a short-term fixed rate investment that you can access (liquidate) on short notice. This will ensure that you can act quickly. The housing market is currently very competitive, and you do not want to miss out on your dream home because you cannot access your invested funds or because a last-minute market shift significantly reduces the invested sum, and you are no longer able to afford it. That would be heart breaking.

To avoid this fate, you should adjust your investment portfolio as your time horizon changes. No matter what your time horizon is, you should have a discussion with your Financial Advisor about what investment approach may be appropriate for your particular situation.

Toni-Ann Neita-Elliott, CFP is the Vice President, Sales & Marketing at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual, and institutional investor. Visit our website at www.sterling.com.jm

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