Investment Strategies Based Your Time Horizon

If you just started investing, it’s not going to be an easy job to figure out what and how to invest with so many choices out there. Yes, building a sound investment portfolio is never a piece of cake for anyone starting from scratch. With hundreds, even thousands, of mutual funds and ETFs to choose from (it will even more confusing if individual stocks are included), one can be easily overwhelmed.

But before choosing what to invest, you will need to decide how to invest first because your investment objective will determine your actual investments. For a new investor, the problem of determining how to invest isn’t any easier to solve than picking investments. However, there are strategies that can help and one of them is investing based on your time horizon. The reason for using different strategies for different time horizons is that we know the stock market is volatile in nature and it could take years for the stock market to recover from a severe downturn, like the one we are experiencing now. Though at the end, stocks always outperform bonds, in the short term, the stock market could take a big bite on your portfolio and leave you with no time to recover if you need the money soon after. With all these considered, it’s safe to say that your investment time horizon determines your investment strategy.

So what’s your time horizon? Depending on your investment goal, which could be more than one, you may have different time frames to achieve each goal. For example, you may be saving for a new car, a new house, or your retirement. All these different goals come with different time frames and, therefore, require different methods. In general, for short-term goals, play it safe with well-liquidated, short-term investments such as cash, CDs, or short-term Treasuries; for long-term objectives, lay the foundation early on by investing entirely in stocks.

Now let’s see some examples of how to invest for different objectives with a few asset allocation plans:

• Save for a new car: Time horizon – 3 years or less; Asset allocation – 100% in short-term investments;
• Save for a house down payment: Time horizon – 4 to 6 years; Asset allocation – 20% in stocks, 30% in short-term, 50% in bonds;
• Save for college: Time horizon – 7 to 12 years; Asset allocation – 10% in short-term, 30% in bonds, 60% in stocks;
• Save for Retirement: Time horizon – 13 to 16 years; Asset allocation – 20% in bonds, 80% in stocks;
• Saving for Retirement: Time horizon – 17 years or longer; Asset allocation – 100%;

Remember, these are just some general guidelines for initial asset allocation plans for different investment objectives. As the time frame changes, asset allocation has to be adjusted accordingly.

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