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What is Investment Horizon?
Investment horizon refers to the length of time an investor expects to hold an investment before liquidating it. It influences asset allocation, risk tolerance, and investment strategy.
Definition
Investment horizon is the time period over which an investor plans to invest funds to achieve specific financial objectives.
Key Takeaways
- Determines suitable asset classes and risk levels.
- Varies based on goals, age, and liquidity needs.
- Affects return expectations and volatility tolerance.
Understanding Investment Horizon
An investor’s horizon can be short-term, medium-term, or long-term. Short-term horizons prioritize capital preservation and liquidity, while long-term horizons allow for higher exposure to growth-oriented assets such as equities.
Understanding the investment horizon helps investors align portfolios with life goals such as education funding, business expansion, or retirement. It also guides rebalancing decisions as goals approach.
Institutional investors often operate with long investment horizons, enabling them to invest in infrastructure, private equity, and long-duration assets.
Types or Variations
Short-Term Horizon: Less than 3 years.
Medium-Term Horizon: 3–10 years.
Long-Term Horizon: More than 10 years.
Real-World Example
An individual saving for retirement 25 years away can adopt a long-term investment horizon and tolerate short-term market volatility in pursuit of higher returns.
Importance in Business or Economics
Investment horizon shapes capital allocation, risk management, and financial planning. It is essential for aligning investments with objectives and ensuring appropriate exposure to market risk.
Related Terms
- Asset Allocation
- Risk Tolerance
- Portfolio Management
Sources and Further Reading
- Investopedia
- Organisation for Economic Co-operation and Development (OECD)
- International Monetary Fund (IMF)
Quick Reference
- Core Idea: Length of investment time.
- Impact: Risk and asset selection.
- Common Use: Financial and retirement planning.
Frequently Asked Questions (FAQs)
Can investment horizon change over time?
Yes. Life events and financial goals often shorten or extend investment horizons.
Does a longer horizon reduce risk?
It reduces short-term volatility risk but not all forms of risk.
Why is investment horizon important for portfolio design?
Why is investment horizon important for portfolio design?
It ensures assets match time-based goals and risk capacity.
