Jun 29, 2023  | Tags: time horizons, strategy, Investment

Our insights

Put simply, the goal with every investment is to realise a return and build wealth.

But equally, every investment comes with a level of risk, no matter how small.

That’s where time horizons come into the equation.

Risk and temporary negative outcomes which can eventuate may be tolerated in the long-term.

In the short term, they can be a disaster.

That’s why with every investment, there are three key considerations:

Your goals - what are you saving and building wealth for, what outcome are you trying to achieve?

Your risk tolerance level - are you prepared to accept high-risk investments for the possibility of a high return but with the potential for market volatility and short-term negative returns?

Your time horizon - how long are you prepared to invest for? When do you need your money?

As a general rule of thumb, the longer your time horizon the more risk you can tolerate, allowing you to invest in stocks which are more volatile.

The shorter your time horizon, the less risk you can tolerate, meaning your investment should be geared towards more reliable bonds.

Crystallising what you are saving for will help you decide which of the three time horizons is right for you.

Short-term time horizons (0-3 years)

This applies to anyone with a small window to invest who wants to be sure of accessing their money when they need it.

They don’t have the luxury of considering riskier investments with the opportunity of greater returns because they can’t afford a negative market fluctuation or business failure to compromise their investment.

Put simply, they don’t have the time to recover that loss.

A young person saving for a car or house may have a short-term time horizon as may a couple approaching retirement unwilling to risk their sizeable nest egg.

Savings accounts and fixed-term deposits are the safest but least rewarding investment option.

Short-term investors may prefer managed funds, corporate or government bonds.

But you should always consult with a financial advisor about the associated higher levels of risk along with any fees that accompany them.

Middle-term time horizons (3-10 years)

Medium-term investors are looking for a return on their money within 10 years.

They may have enough time in the market to be able to sustain some corrections or negative returns.

Hence they will generally opt for a diversified mix of lower risk bonds and a more aggressive component of stocks.

That precise mix will be determined by the exact length of their time horizon.

Investing for  a child’s college education fees at the time of their birth may be one example of a medium-term investment.

As the investment approaches its final few years before liquidity is needed, it may be wise to consider adjusting the composition of the investment towards lower risk assets, more commensurate with a short-term investment strategy.

Long-term time horizons (10+ years)

Long-term investors have time on their side.

They can afford fluctuations in the market that might make shorter-term investors nervous.

Because of this, they can afford to consider higher-risk investments that deliver higher rewards.

Long-term investors will have a high proportion of stocks in their portfolio.

They can diversify by adding managed funds, ETFs (exchange traded funds) and property.

Long-term investors are generally saving and planning for their retirement.

But because of the potential for volatility, it’s a strategy that demands patience and discipline.

The earlier you start investing, the greater the rewards you stand to realise.

Get advice today

It’s important to consider your goals, risk tolerance and time horizon with any investment and wealth plan.

There’s also no reason why you can’t have a strategy with multiple investment streams and time horizons tailored for different financial goals.

For example, you could be saving money for your first-born’s education, while still putting money away for your retirement.

Both are great strategies but both need to observe very different time horizons, investing in contrasting products to achieve the best possible outcomes.

That’s where Calder Wealth Management can help.

Calder are financial experts who can help you make the best financial decisions now and going forward.

We’ll work with you to devise investment strategies whatever your financial goals.

We will also periodically review your portfolio to ensure it remains aligned with market conditions and your own changing goals.

There really is no substitute for quality financial advice from a team personally invested in your wealth accumulation.

At Calder, we pride ourselves on leading our clients into the future with structure, financial stability and confidence. 

Contact us today to discuss all of your financial needs and concerns.

Written by Aaron Doig

The information contained in this article is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.

Taxation, legal and other matters referred to on this website are of a general nature only and are based on Calder Wealth Management’s interpretation of laws existing at the time and should not be relied upon in place of appropriate professional advice. Those laws may change from time to time.

CWM specialises in wealth management with a focus on advice, investment, sustainability, insurance and finance.