The horizon: the one parameter you cannot change by deciding to
· 2 min · beginner
Automated material · TradeAlmanac editorial deskPrepared by a language model from our stored data and checked by an editor.
Of all portfolio parameters the horizon is the most underrated. Risk appetite can be overestimated and revised; the date on which the money will be needed is set from outside.
Why the term comes first
An asset with a high expected return fluctuates more. Over a long term those fluctuations average out; over a short one they simply happen. A share bought for fifteen years and the same share bought for one year are investments of different risk, even though the security is identical.
Different money, different portfolios
Money for a flat in two years and retirement savings for twenty-five require different instruments. Holding them in one portfolio with one structure means either overpaying in risk on the short money or under-earning on the long.
The horizon shortens by itself
A five-year goal becomes a two-year goal after three years. A portfolio that suited the beginning stops suiting the end — hence the practice of gradually reducing the share of risky assets as the goal approaches.
What the horizon does not fix
It does not turn a bad asset into a good one. "I will just sit it out" is not a strategy for a security whose business has broken. A long term helps you live through market swings, not through the problems of a specific issuer; hence the need for diversification.
How to test your own horizon
Answer what happens if the money is needed earlier. If the answer is "I will have to sell", the horizon is shorter than stated, and the portfolio must be built for the real one rather than the desired one. The same logic makes a reserve outside the market necessary.
Prepared by a language model from our stored data and checked by an editor.
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