Time horizon is the length of time you expect to hold on to an investment before selling it. Time horizon can help an investor determine how much risk to take when investing and what types of investments may be suitable for them and their investment goals.
A person’s time horizon can also be impacted by their age, health, employment status, financial situation and even things like if they own a home or have children. Think of it this way. All of the things we just mentioned have the ability to change your time horizon if the unexpected happens. Let’s say you purchase an investment with the expectation that you won’t need to sell it for at least a two to three years as you plan to use that money as a future down payment on a new car. Six months go by and suddenly you lose your job, or maybe your basement floods. Due to these unexpected circumstances you may need that money now and for a different purpose than originally planned. Hopefully, the investment hasn’t decreased in value in the short time period and cause you to lose money.
To make sure you don’t impact your time horizon negatively like in the example above, it is recommended that investors diversify their investments time horizon. Having investments with a time horizon that matches your car payment plan and having savings and/or investments with shorter time horizons for emergencies like the job loss or basement flood can help you stay on track and decrease the chances of you losing money on your investment due to having to change your time horizon.