By Anh Tran, Esq.
& Christine Tang, CFP®
Modern Wealth Advisors, Inc.
Although they may hate to admit it, new investors often make the mistake of being a bit too confident when deciding where to put their money. Confidence can be good but putting too much of your money into an investment too quickly can end up being very bad. You wouldn’t expect to be able to save up for a down payment on a new house in one month’s pay, right? Okay, so maybe that example is a bit extreme, but regardless of the nature of the investment, you should always begin by asking yourself “[Self], what is your time horizon?” Actually, you can start off by asking “What is a time horizon?” Photo from Under 30 CEO
Well, a time horizon is basically the amount of time that passes between an initial investment and when that investment can be liquidated.
Your own personal time horizon depends on how quickly you want to cash in on your investments. In order to figure out what your time horizon is, you must first consider your financial goals in the future. For example, if you’re looking to save up for a new car, plan on taking about a year or two in order to do so. Saving for a down payment on a new home may take 5+ years, while preparing for retirement can take some people as long as 40 years.
Although people may have the same financial goals, individual time horizons may vary on several factors. For instance, although two people may be saving up to buy a new car, the person with the higher salary will probably have a shorter time horizon than the person with the lower salary, since a higher salary means it won’t take as long to save up the necessary money.
Take a second and try to think of what your future financial goals are. Whether it is saving up to go to Hawaii for a week or building up your retirement fund, try to pair your financial goals with a reasonable time horizon.
Now that you have considered your financial goals and their respective time horizons, you are probably asking yourself “[Self], how can I utilize my time horizon in order to make better investments?”
Well, in order to make smarter investments, you must choose to put your money into portfolios that match your time horizon. If you have a large time horizon, let’s say somewhere around 10 years, you are going to want to consider longer-term investments. These investments are much better equipped at handling market volatility since they have more time to recover from market fluctuations. This allows you to take larger risks in order to bring in greater rewards over time.
Modern Wealth Advisors, Inc. is a full service wealth management firm located in Irvine, California. With more than 20 years of collective advisory experience, our mission is to help our clients manage life’s milestones. No matter what stage you are in life, our goal is to help you accumulate wealth, protect wealth, and build a legacy so you and your family can pursue your dreams. We strive to achieve this through a combination of comprehensive financial planning, innovative solutions, and cutting-edge technology which are tailored to your individual needs and goals. For more information, please contact us at (949)464-8299 or [email protected]. Please visit us at www.modernwealth.com. |
However, choosing long-term investments also means that you won’t be seeing your hard-earned cash any time soon. Let’s say you are saving up for the next year in order to buy a new car. It wouldn’t make sense for you to put your money in government bonds that don’t mature for another 10 years.
On the other hand, those looking for quicker returns on their money would be more interested in investments that match shorter time horizons. Although the returns won’t be as large, you are given more freedom, in the sense that your money isn’t being locked up in the same investment for the next 10+ years. Short-term investments also hold fewer risks and are less prone to be affected by market volatility.
For instance, if you know you want to go on a vacation in about a year or so, a good choice would be to put your money inside a savings account or short-term bond that you know you can liquidate quickly.
However, short-term investments tend to have smaller payouts since there isn’t much risk involved. If you have a large time horizon and are looking for a more profitable payday, then a long-term investment like equities would be more suitable.
Setting a time horizon is usually a pretty simple task, which is why people often overlook this step. Nevertheless, if you are looking to create a healthy financial portfolio that suits your personal needs, choosing investments based on your time horizon is crucial.
