During last week’s Financial Literacy Friday, I talked about the importance of net worth and going through the process to calculate your own net worth. However, one very important asset that won’t show up in your calculations is your time horizon. Your time horizon is simply the amount of time you have to hold a certain investment, and is critical in figuring out which investments make the most sense for you. So, with that being said, let’s take a deeper look at what the time horizon is and why it’s so important.
As I mentioned, the time horizon is the amount of time you hold a certain investment and the longer you have the more likely it is that you’ll be able to come out ahead. The stock market has, since its inception, trended upwards despite some periods of down years. If you think about the crash of 2008-2009 or even the Great Depression which lasted 10 years, these are all relatively short time periods of down years given the overall history of the markets. So, being able to have a time horizon of 20-30 years allows you to take a different look at how you approach investing.
Why it’s Important
Time is usually one’s greatest asset, regardless of the situation, so having an extended time horizon can make a world of difference in the outcomes of your investment experience. Being able to stay in the markets for 30 years means that far more options will be open to you and allows for far more customization of your portfolios. If you’re 5 years from retirement, the options you have are far more limited as you won’t have the ability to make up for short term losses, meaning your investments will have to be fairly conservative. If you have a longer time horizon, you’ll be able to be more aggressive with your investments as long term gains will generally outshine short term losses.
This is one of the most critical pieces of information for me as we sit down to plan as it gives me a sense of the amount of flexibility we’ll be able to build into your plan as well as allowing me to more easily tailor the investment experience. But the most important insight a long time horizon should provide is the ability to look at the market in a different way. When you have investments you believe in and are planning to hold for the next 20 or 30 years, then even several years of volatility will look like small blips on the overall trajectory of your portfolio. When you’re able to separate yourself from the daily ups and downs, you’ll be able to have a greater appreciation of being able to have your money work for you.
If you have any questions or comments about time horizons or their effects on your plan, comment below or send me a message and I’ll be happy to go through them with you.