What is an investment horizon?
An investment horizon is the period of time an investor expects or intends to hold an investment before converting it into cash.
“It can last from just a few weeks or months to several years or even decades. The investment horizon is closely related to the tolerance for risk, chosen investment instruments”, emphasizes Mantas Skardžius, senior portfolio manager of Luminor Bank.
Vladimir Ivanov’s photo. / Mantas Skardžius
Therefore, it is very important to set clear financial goals before deciding on an investment horizon.
“Setting a clear goal gives direction to your investments – maybe you’re saving for a down payment on a home loan, saving for life’s contingencies, or planning for retirement?” When defining these goals, keep in mind your age, income stability and expected expenses,” says the expert.
Investment horizon – short or long?
A short investment horizon is usually more suitable for investment goals that can be achieved within 1-3 years – saving enough money for a vacation, wedding, buying a new car, etc.
“Achieving such short-term investment goals resembles, in simple terms, the simplest saving of money with a relatively small additional return. Therefore, in this case, the risk of losing the principal amount should be reduced as much as possible and at the same time ensure that the investments can be easily converted into cash if necessary”, advises M. Skardžius.
After choosing a short investment horizon, the expert suggests investing in low-risk instruments, such as investment-grade bonds, government savings bonds or placing a fixed deposit.
“After choosing riskier instruments, in the short term the invested amount may begin to decrease rather than increase. Such market fluctuations are normal and, when investing for at least 5-10 years, they even out in the long run, but when investing for a shorter period of time, they are, of course, intolerable,” says an expert from Luminor Bank.
A long investment horizon usually lasts at least a few years, but if your goal is, for example, to save money for your children’s education or retirement, it can last for decades.
“One of the advantages of a long horizon is better tolerance for inevitable short-term market fluctuations and the effect of exponentially growing compound interest returns. Therefore, individuals with a long investment horizon are recommended to take advantage of these advantages by investing in riskier and more potential instruments – shares, exchange-traded funds (ETF), etc.”, – recommends M.Skardžius.
After choosing the horizon, what’s next?
Regardless of the chosen horizon, it is advisable to follow certain principles when investing, which can help to avoid disappointment.
“Diversification of investments can help reduce risk while increasing potential returns.” Of course, in the short term, when investing in such safe instruments as, for example, government bonds or savings bonds, this may be a little less relevant, but in the longer term, diversification is probably necessary,” emphasizes the representative of Luminor Bank.
Also, as the expert advises, it is especially important to gradually move from riskier to less risky asset classes as you approach the end of your investment horizon to preserve the value of the assets you have already accumulated. Second-tier pension funds in Lithuania also operate on this principle.
“Finally, don’t forget – the investment environment is very dynamic. Regularly reviewing your portfolio and taking steps to improve it as necessary will ensure that it consistently meets your changing goals and changing market conditions. If you need professional advice, I recommend contacting financial advisors, who will be able to help and answer all questions,” advises M. Skardžius.
