Investment Horizon

The investment horizon is one of the most important factors in choosing investments. It determines how much risk an investor can reasonably take and which types of assets are suitable.

Money needed soon, within a year or two, generally belongs in safe, stable assets, such as savings accounts or short-term bonds, because there is little time to recover from a market fall. Money not needed for ten or twenty years can usually be invested in higher-risk, higher-return assets, such as shares, because there is more time to ride out market ups and downs.

For example, someone saving for a house deposit needed in eighteen months would usually avoid shares, while a 30-year-old saving for retirement could reasonably invest mostly in shares.

Investment horizons often differ for different goals. One person might have a short horizon for an emergency fund, a medium horizon for a child's education and a long horizon for retirement, each with a different investment approach.

As a goal approaches, the investment horizon shortens, and investors often gradually shift towards lower-risk investments. This is the principle behind target-date funds.