Investment Horizon
Explanation: An investment horizon is the total length of time that an investor expects to hold a security or a portfolio. The investment horizon can be short-term (less than a year), medium-term (1-5 years), or long-term (more than 5 years). The investment horizon is crucial for determining the appropriate investment strategy, risk tolerance, and asset allocation.
Example: A young professional planning to buy a house in five years may have a medium-term investment horizon. They might choose a mix of stocks and bonds to balance growth and stability. Conversely, someone saving for retirement 30 years away has a long-term horizon and may invest more aggressively in stocks for higher potential growth.
Reference Link: For more information on investment horizons, visit Investopedia’s Investment Horizon.
FAQs:
- Why is the investment horizon important?
- It helps determine the appropriate level of risk and asset allocation to achieve financial goals.
- How does investment horizon affect risk tolerance?
- Longer horizons generally allow for higher risk tolerance as there is more time to recover from market volatility.
- Can investment horizons change?
- Yes, life events and changes in financial goals can alter an investor’s horizon.
- What types of investments are suitable for short-term horizons?
- For short-term horizons, low-risk investments like savings accounts, CDs, and short-term bonds are typically suitable.
- What types of investments are suitable for long-term horizons?
- Long-term horizons often favor higher-risk investments like stocks and real estate, which have higher growth potential.