make an essay discussing what is investment horizon

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Investment Horizon

Refers to an investor's duration to hold an asset before expecting a return

• What Is Investment Horizon?
• Types Of Investment Horizons
• Investment Horizon And Risk
• Example Of Investment Horizon

Investment Horizon And Asset Allocation

Investment horizon faqs, what is investment horizon.

Investment horizon refers to an investor's duration to hold an asset before expecting a return. It can range from short-term (days/weeks) to long-term (years/decades), influencing investment strategies and risk tolerance.

Every investor wants their assets to increase over time, so they can eventually use that money to buy something or enable them to retire. As we know, every investor has different motivations for investing. Some of the most common reasons for investing are:

• Beat inflation
• Reach a financial goal like buying a home, starting a business, or funding education
• Reduce taxable income
• Get in early by investing in a start-up company

The investment you choose and how much you attribute to that asset depends primarily on your time horizon. The investment horizon is the total time you expect to hold an asset.

Generally, older investors tend to invest their cash in more conservative assets with less risk. This is because they are more likely to need the money soon, and periods of significant volatility can devastate their portfolios. 

Younger individuals tend to have a longer investment horizon and invest in riskier investments to earn higher returns potentially. Funding for the long term makes periods of volatility less detrimental to your portfolio, as there is more time to recover from losses.

Your age and the target date of your financial goals affect your investing horizon.

Key Takeaways

• Investment horizon refers to the duration an investor plans to hold an asset before expecting a return, influencing investment strategies and risk tolerance.
• It is crucial for aligning investments with financial goals such as retirement, purchasing a home, or funding education.
• Short-term (days/weeks), medium-term (years), and long-term (decades) horizons impact asset allocation and risk tolerance.
• Investors with shorter horizons tend to favor safer investments like bonds, while those with longer horizons may allocate more to stocks for higher potential returns.

Types of Investment Horizons

Before investing, consider how long you plan to hold investments. The investment horizon impacts the performance of various asset classes. Time plays a crucial role in the performance of stocks, bonds , mutual funds , ETFs , and other types of investments. 

There are three general types of horizons:

• Medium-term

Investors may engage with multiple time horizons, but individuals at different life stages may prioritize certain time ranges. For example, older people will likely be focused on short—and medium-term horizons.

Typically, the longer the horizon, the more risk you are willing to take because you will likely not require access to your funds anytime soon. However, this is not always the case.

Consider your time horizon and understand your risk profile to ensure an investment makes sense for your financial situation. But, of course, your time horizon is also okay (and expected) to change as your financial situation and age change.

This includes people who have short-term financial goals, such as buying a car. Many individuals may invest a portion of their savings for short-term goals in bonds or low-risk investments to earn higher returns than a traditional savings account .

Examples of short-term goals include:

• Car payment
• Gap year travel

While often safer, short-term investments tend to have lower yields. They are usually intended to maintain the value of the original investment rather than produce high returns.

Investors in this category tend to be more risk-averse, often reluctant to take on more risk.

Some examples of safer investments for short-term time frames are:

• Money market funds
• Certificates of deposit
• Short-term bonds

Liquidity is also necessary with short-term investing to allow easy access to your money. For instance, let's say you are saving money for a down payment on a car in one year. You know you will need the money, so you want to ensure your investment doesn't lose value.

One option could be to put the cash in a short-term certificate of deposit . This would allow you to earn a higher interest rate on your deposit but with minimized risk.

An example of asset allocation for the short term is:

You must ensure you will not need to withdraw the money before the maturity date to avoid paying a fee.

Medium-Term

Medium-term time horizons typically span five to ten years, indicating a timeframe for investors to hold their securities before considering selling. This includes individuals who are less risk-averse and do not have specific long-term plans for their investment. 

Examples of medium-term goals include:

• House down payment
• Children's education
• Home Remodel

Medium-term investors are in the middle of being conservative and aggressive. As a result, they tend to have portfolios with a mix of stocks and bonds to provide higher returns and reduce risk. This mix of securities will protect you from significant losses.

Additionally, exchange-traded funds (ETFs) can be a valuable asset for medium-term investors because they have the potential for higher returns but come with less risk than stocks.

For instance, you have a child who will need tuition in nine years. With the extended period, you can afford some risk, but you should be cautious because you cannot afford to lose a significant portion of your investment

The length of a financial goal depends on each investor's financial situation, as some may have a higher income or less debt than others, which affects how much someone can contribute to their goal.

One option is to invest in a mix of stocks and bonds. Asset allocation for the medium term is influenced by factors including investment goals, time horizons, risk tolerance , target amounts, and prevailing market conditions.

An example of asset allocation for the medium term is:

Due to their extended investment horizon, long-term investors are often more tolerant of risk, potentially allowing them to benefit from the growth of securities over time. As a result, shorter periods of volatility are often irrelevant over long periods.

Long-term investing has a horizon longer than ten years. Many people begin saving for retirement early in life. They invest this money instead of putting it in a savings account because they will not need access anytime soon.

Examples of long-term goals include:

• Starting a business

Allocation decisions should consider individual factors such as risk tolerance, investment goals, and market conditions and may include a more diversified portfolio.

While long-term investing may involve more risk, it also offers the potential for greater returns, depending on the specific assets and market conditions. In addition, long-term investments make sense for young people who can invest cash they will not need soon.

Due to compounding, time can be your biggest ally in investing. Compounding enables your investment to grow exponentially, and investing early in life can pay big dividends.

An example of asset allocation for the long-term is:

Investment Horizon and Risk

There is always some risk associated with investing, especially in stocks. Below are a few of the most common threats your investments may be exposed to:

• Inflationary risk: Inflationary risk refers to the possibility that inflation is higher than the returns on your investments. This causes the  actual value  of the asset to decline. Bonds are particularly susceptible to these risks.
• Interest rate risk : Interest rate risk concerns unexpected changes in interest rates. This is primarily a concern for bonds and other fixed-income securities. This risk can be reduced by holding bonds of various durations.
• Business risk: Business risk refers to the possibility of a company failing or declaring bankruptcy. This causes your assets to lose value, possibly becoming worthless. The most effective method to reduce exposure to this risk is to maintain a diversified portfolio.
• Market risk : Like business risk, market risk acknowledges the stock market's volatility. Large-scale events, speculative behavior, and market crashes can all affect the value of your investments. This risk is typically more relevant for short—and medium-term horizons because, over a long period, investments are more likely to increase in value.
• Default risk: Default risk is the likelihood that a borrower cannot repay their debts. It is particularly relevant to debt-based securities such as bonds. Investing in bonds with higher credit ratings can limit this risk.

Example of Investment Horizon

Let's say you recently graduated from college and have lived in an apartment in the city for two years. At twenty-four, you are looking to move into a home in a local suburb with your partner, whom you've been with for years.

You have finished paying off your student loans but plan on getting a used car within the next six months. You have a little over half of the cost saved up but need to figure out where to put the cash from your savings account to earn more Interest. 

In this case, purchasing a car is a short-term horizon, so you want to look for something conservative but with a higher yield than your current savings account, which only pays 0.75%. So you decide to put the money into a 6-month certificate of deposit with an APY of 1.85%. 

Next, you want to make a down payment on a house in 6 years but still need to generate more cash.

This is a medium-term horizon where you have more time to take on riskier investments. You do not need the money soon and are willing to take on some risk.

You invest 60% of the cash into funds like the Vanguard S& P 500 ETF (VOO) and the Vanguard Dividend Appreciation ETF (VIG). You notice that VOO's historical performance over the past five years has been 12.5%, and VIG's has been 12.4%.

You are comfortable with the safety of these investments and understand there is a slight possibility that the assets will lose value. Therefore, to diversify your portfolio, you also put 30% of your cash into a high-yield bond index, such as the Vanguard High-Yield Corporate Fund (VWEHX).

The remaining 10% of the cash is kept in your traditional savings account as a safety net if you have to renew your lease in a few years because the other securities lost value. 

Additionally, you plan to marry your partner soon and understand that the wedding will be expensive. Depending on when you get married, this could be a short—or medium-term goal.

Because you are uncertain when you will get married, you decide to invest 40% in stocks, 30% in bonds, and 30% in a high-yield savings account. Meanwhile, you are already beginning to plan for retirement because you are a knowledgeable investor and understand your investment horizon.

In addition, you have taken advantage of your employer's 401(k) savings fund, which your company matches. 

You do not plan on retiring for at least thirty-five years, so you devote 90% of your portfolio to stocks to maximize potential returns. Given that you do not need the money anytime soon, you are comfortable with a portfolio of primarily stock risk. 

Your asset allocation determines how much risk you subject yourself to. For example, investors with long-term horizons are likely to invest more heavily in stocks, while short-term investors often have more bonds.

This is a suggestion on asset allocation by age, but your allocation depends on your financial situation and investing profile.

As you age, your portfolio may require rebalancing to maintain your desired asset allocation and ensure it aligns with your risk tolerance.

Diversification is the key to providing a balance of potential risk and return. Diversifying your portfolio limits your asset-specific risk, so if one company or sector underperforms, your portfolio doesn't lose all its value.

Your asset allocation should change as you age and your investment horizon adapts.

Your investing horizon depends on your financial goals, age, and risk tolerance . This calculator by SmartAsset enables you to look at your potential returns depending on how much you contribute and how many years you allow your portfolio to grow. 

For example, if you started with $10,000 and invested $5,000 annually. Assuming an 8% return per year, after 30 years, your portfolio would grow to $667,043. 

Note that, after accounting for inflation, the average stock market return is 7-8%. This is based on the performance of the S&P 500 Index.

Factors include financial goals, risk tolerance , age, income level, and liquidity needs. Younger investors with long-term financial goals and higher risk tolerance may have a longer investment horizon compared to retirees seeking stable income.

Investors should match their horizon with the time horizon of their financial goals. For example, retirement savings typically have a long-term horizon, while saving for a down payment on a house may have a shorter horizon.

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Investment Horizon

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What is Investment Horizon?

Investment horizon is a term used to identify the length of time an investor is aiming to maintain their portfolio before selling their securities for a profit. An individual’s investment horizon is affected by several different factors. However, the primary determining factor is often the investor’s risk tolerance.

Investment horizons are a critical piece in portfolio investing because they help determine the amount of time an investor will hold their investments to compensate for the risks that they take when investing.

Breaking Down Investing Horizons

Individuals in their early investing years are the most likely to have longer-term investment horizons. This is simply because they have more time to make a profit from their investments or recover from losses sustained when taking risks. For the same reason, they are also more likely to make riskier investments with the potential for a greater payoff down the road.

Seasoned or older investors are more likely to use a shorter horizon because they have less time to realize profits.

Time horizons for investing is a key concept in the Fixed Income Fundamentals Course , a prerequisite for the FMVA Certificate

Three Types of Investment Horizons

1. short-term investment horizon.

First, let’s talk about the short term. This investment time frame, as mentioned above, is typically best for individuals in their later years, preparing for retirement. It may also be appropriate for individuals who are strongly averse to risk or need to access a significant amount of cash in the near future. A short investment horizon usually doesn’t exceed a period of three years. For these risk-averse investors, it’s best to have guaranteed assets or securities, including high-interest savings accounts and certificates of deposit .

2. Medium-term investment horizon

Investors who are less risk-averse and not looking for cash for retirement or a large purchase are better suited to a medium-term investment horizon. This usually means a period of three to ten years. Investors with this type of investment horizon are somewhere in the middle between low and high risk, meaning a conservative and diversified portfolio is best, mixing investments in both stocks and bonds . The ratio of stocks to bonds should be determined by the individual’s specific wants and needs.

3. Long-term investment horizon

Finally, for investors willing to take big risks for big rewards and who have the time to wait for the payoff or to recoup losses after risky endeavors, long-term investment horizons are often the way to go. In most cases, the portfolio of the long-term investor includes a significant amount of risky investments with potentially high yields. The remainder of the portfolio should then be a mix of stocks and bonds, with the ratio leaning more heavily towards stocks.

Every investor must determine the amount of risk they are willing and able to tolerate and how much time they can devote to maintaining their portfolio before needing to access their profits. These key elements affect the investor’s investment horizon, which ultimately affects what they fill their investment portfolio with.

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What Is Investment Horizon: A Comprehensive Guide

Investment horizon is a crucial concept in the world of finance. As a finance expert, I am here to provide you with a comprehensive guide on understanding investment horizon, its importance in financial planning, factors influencing it, different types of investment horizons, and how to determine your own investment horizon. So, let’s delve into this fascinating topic!

Understanding the Concept of Investment Horizon

Before we proceed further, let’s first define what exactly investment horizon refers to. Investment horizon is the length of time that an investor plans to hold an investment before needing the funds for a specific purpose.

As a finance expert, I can’t emphasize enough the significance of having a clear understanding of your investment horizon. It provides a roadmap for your investment strategies and helps in making informed decisions.

Definition of Investment Horizon

The investment horizon is the duration an investor plans to hold their investments to meet specific financial goals. It can vary from short-term, medium-term, to long-term, depending on your needs and objectives.

When considering your investment horizon, it is important to take into account various factors such as your age, risk tolerance, and financial goals. For example, if you are young and have a long-term investment horizon, you may be more inclined to invest in higher-risk assets with the potential for higher returns. On the other hand, if you are nearing retirement and have a shorter investment horizon, you may prefer more conservative investments that prioritize capital preservation.

Additionally, your investment horizon can also be influenced by external factors such as market conditions and economic trends. It is important to regularly reassess your investment horizon and make any necessary adjustments to your investment strategy to ensure it remains aligned with your goals.

Importance of Investment Horizon in Financial Planning

Financial planning involves setting achievable goals and charting a path to attain them. Your investment horizon plays a crucial role in this process, as it allows you to align your investments with your goals.

By having a clear investment horizon, you can tailor your investment strategy to match your time frame and risk tolerance. This ensures that you make appropriate investment choices that align with your goals, whether it’s buying a house, planning for retirement, or funding your child’s education.

Furthermore, understanding your investment horizon helps you manage your expectations and avoid making impulsive investment decisions based on short-term market fluctuations. It allows you to take a long-term perspective and stay focused on your financial goals, even during periods of market volatility.

Another advantage of considering your investment horizon in financial planning is the ability to diversify your investment portfolio effectively. By spreading your investments across different asset classes and sectors, you can reduce the risk associated with any individual investment and potentially enhance your overall returns.

Moreover, having a well-defined investment horizon enables you to take advantage of compounding returns. By reinvesting your investment earnings over a longer period, you can benefit from the power of compounding, where your returns generate additional returns, leading to exponential growth over time.

In conclusion, understanding your investment horizon is essential for effective financial planning. It helps you align your investments with your goals, manage risk, and make informed decisions. By considering various factors and regularly reassessing your investment horizon, you can ensure that your investment strategy remains on track to achieve your financial objectives.

Factors Influencing Investment Horizon

Several factors influence an individual’s investment horizon. Let’s explore some of the key determinants:

Age and Retirement Goals

Your age and retirement goals have a significant impact on your investment horizon. Younger individuals with longer time until retirement can afford to take more risks and have a longer investment horizon. This is because they have more time to recover from any potential losses and can benefit from the power of compounding over a longer period. On the other hand, individuals nearing retirement may opt for a shorter investment horizon to safeguard their capital and ensure a stable income during their retirement years.

For example, let’s consider two individuals: John, who is 25 years old and has just started his career, and Sarah, who is 55 years old and plans to retire in the next 5 years. John has a longer investment horizon of around 30-40 years, allowing him to invest in higher-risk assets such as stocks or mutual funds that have the potential for higher returns. Sarah, on the other hand, has a shorter investment horizon and may choose to invest in more conservative options such as bonds or fixed deposits to preserve her capital and generate a steady income.

Risk Tolerance

Your risk tolerance is another critical factor that affects your investment horizon. Some individuals have a higher appetite for risk and may be comfortable with longer investment horizons, allowing for potentially higher returns. These individuals are willing to endure short-term market fluctuations and volatility in exchange for long-term growth.

On the other hand, individuals with a lower risk tolerance may prefer shorter investment horizons to minimize the possibility of losses. They may opt for safer investment options such as government bonds or certificates of deposit, which offer lower returns but provide more stability and security.

For instance, imagine two investors: Mark, who is a risk-averse individual, and Lisa, who is more risk-tolerant. Mark prefers a shorter investment horizon and chooses to invest in low-risk assets such as treasury bills, which offer a guaranteed return over a short period. Lisa, on the other hand, has a higher risk tolerance and is willing to invest in a diversified portfolio of stocks and real estate, with a longer investment horizon of 10-15 years, aiming for higher potential returns.

Financial Goals and Objectives

Understanding your financial goals and objectives is essential in determining your investment horizon. Short-term goals, such as purchasing a car or going on a vacation, usually require a short investment horizon. These goals are typically achieved within a few years, and the investment strategy focuses on capital preservation and liquidity.

Conversely, long-term goals like retirement or funding your child’s education necessitate a longer investment horizon. These goals require a disciplined approach and the ability to withstand market fluctuations over an extended period. The investment strategy for long-term goals focuses on capital growth and may involve a diversified portfolio of assets.

For example, let’s consider two individuals: Emma, who wants to save for a down payment on a house in the next 3 years, and Michael, who wants to save for his child’s college education in 15 years. Emma’s investment horizon is relatively short, and she may choose to invest in low-risk options such as a high-yield savings account or a money market fund. On the other hand, Michael has a longer investment horizon and can afford to invest in a mix of stocks, bonds, and mutual funds to potentially achieve higher returns over the long term.

It is important to note that investment horizons can vary for different individuals based on their unique circumstances, risk tolerance, and financial goals. It is crucial to assess these factors carefully and consult with a financial advisor to determine the most suitable investment horizon for your specific situation.

Different Types of Investment Horizons

Investment horizons can be classified into three primary categories: short-term, medium-term, and long-term. Let’s take a closer look at each:

Short-term Investment Horizon

A short-term investment horizon typically spans up to one year. It is suitable for individuals who have immediate financial needs, such as building an emergency fund or saving for a down payment on a house. Short-term investments provide quick access to funds and are designed to preserve capital while generating modest returns.

When considering short-term investments, it is important to assess the risk associated with each option. Savings accounts, for example, offer low risk but also low returns. Money market funds, on the other hand, provide slightly higher returns while maintaining a relatively low level of risk. Short-term bonds may offer higher returns but come with a slightly higher level of risk compared to other short-term investment options.

It is crucial to carefully evaluate your financial goals and risk tolerance before selecting a short-term investment strategy. By doing so, you can make informed decisions that align with your specific needs and circumstances.

Medium-term Investment Horizon

A medium-term investment horizon ranges from one to five years. This category caters to individuals with intermediate financial objectives, such as saving for a child’s college education or planning a sabbatical. Medium-term investments aim to strike a balance between risk and return, offering the potential for higher yields compared to short-term investments.

When exploring medium-term investment options, mutual funds can be an attractive choice. These professionally managed investment vehicles pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities. Mutual funds allow investors to access a wide range of assets and benefit from professional expertise.

Certificates of deposit (CDs) are another popular medium-term investment option. CDs offer a fixed interest rate over a specific period, typically ranging from six months to five years. They provide a predictable return and are considered a low-risk investment.

Medium-term bonds, such as corporate bonds or municipal bonds, can also be part of a medium-term investment strategy. These bonds offer higher yields compared to short-term bonds but come with a slightly higher level of risk. It is essential to carefully assess the creditworthiness of the issuer before investing in bonds.

Long-term Investment Horizon

The long-term investment horizon extends beyond five years, often spanning several decades. Long-term investments are ideal for retirement planning or building wealth over an extended period. They provide the opportunity for higher returns but also involve a higher level of risk compared to short-term and medium-term investments.

Stocks are a common choice for long-term investments. Investing in individual stocks or exchange-traded funds (ETFs) allows investors to participate in the growth of companies and potentially benefit from capital appreciation and dividends over time. However, it is important to note that stock prices can be volatile, and thorough research is necessary before making investment decisions.

Real estate is another long-term investment option that can generate income and appreciate in value over time. Investing in rental properties or real estate investment trusts (REITs) can provide a steady stream of rental income and potential capital gains in the long run.

Long-term bonds, such as government bonds or high-quality corporate bonds, can also be part of a long-term investment strategy. These bonds offer higher yields compared to short-term and medium-term bonds but come with a higher level of interest rate risk. It is crucial to consider the prevailing interest rate environment and the creditworthiness of the issuer when investing in long-term bonds.

When planning for long-term investments, it is important to have a well-diversified portfolio that aligns with your risk tolerance and financial goals. Regularly reviewing and adjusting your investment strategy can help ensure that you stay on track to achieve your long-term objectives.

How to Determine Your Investment Horizon

Now that you grasp the importance of investment horizon, let’s explore how you can determine your own:

Assessing Your Financial Situation

Begin by evaluating your current financial situation, including your income, expenses, and existing investments. Understanding your financial standing will help you set realistic investment goals that align with your financial position.

Setting Your Financial Goals

Next, identify your short-term, medium-term, and long-term financial goals. Consider factors such as your retirement plans, major life events, and desired lifestyle. This introspection will assist you in establishing the time frames for each goal, ultimately shaping your investment horizon.

Evaluating Your Risk Tolerance

It’s crucial to assess your risk tolerance when determining your investment horizon. Analyze your comfort level with different types of investments, volatility, and potential returns. This step will enable you to align your investment choices with your tolerance for risk.

By following these steps, you will gain a clearer understanding of your investment horizon. Remember, as a finance expert, I always encourage individuals to review and reassess their investment horizon periodically to ensure it remains aligned with their changing circumstances and financial goals.

So, now that you have a comprehensive guide to investment horizon, put your newfound knowledge to use in planning your financial future. Make informed investment decisions that reflect your goals, risk tolerance, and time frame. Start your journey towards financial success today!

About The Author

Michael taylor.

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Home > Finance > Investment Time Horizon: Definition And Role In Investing

Investment Time Horizon: Definition And Role In Investing

Published: December 13, 2023

Learn the definition and importance of investment time horizon in finance. Understand how it plays a vital role in successful investing and financial planning.

• Definition starting with I

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Investment Time Horizon: Definition and Role in Investing

Welcome to our Finance category! Today, we’ll be diving into an important concept in the world of investing: investment time horizon. Have you ever wondered how the length of time you plan to invest your money can affect your investment strategy? Well, you’re in the right place. In this blog post, we’ll define investment time horizon and explore its crucial role in shaping your investment decisions. So, let’s get started!

Key Takeaways:

• An investment time horizon refers to the duration of time an investor plans to hold an investment before needing the funds.
• The time horizon affects the level of risk an investor can afford to take, with longer time horizons allowing for more aggressive strategies.

So, what exactly is an investment time horizon? The investment time horizon is simply the length of time an investor is willing to commit their funds to an investment before needing to access them. It is an important consideration because it influences the types of investments an individual can make and the level of risk they can tolerate. To better understand its significance, let’s explore its role in investing.

1. Risk vs. Reward

One of the main factors influenced by the investment time horizon is the level of risk an individual can afford to take. Generally, longer time horizons allow investors to be more aggressive and take on higher-risk investments. This is because, over a long period, the market tends to recover from downturns, providing ample opportunity for growth. On the other hand, shorter time horizons require more conservative investment strategies to preserve capital and ensure funds are available when needed.

2. Growth Potential

Investment time horizons also play a vital role in determining the potential for growth. Investments with longer time horizons have a higher potential to generate significant returns due to the power of compounding. Compounding occurs when investment returns are reinvested, leading to exponential growth over time. Therefore, investors with longer time horizons can take advantage of this compounding effect and potentially achieve higher portfolio growth.

Understanding your investment time horizon is crucial for devising a suitable investment plan. Here are a few tips to keep in mind:

• Evaluate your financial goals: Determine when you will need the funds and align your investment time horizon accordingly.
• Consider your risk tolerance: Be realistic about your ability to withstand market fluctuations and adjust your investment strategy accordingly.
• Diversify your portfolio: Spread your investments across different asset classes and industries to reduce risk and maximize potential returns.
• Periodically reassess and adjust: As your investment time horizon changes, reassess your goals and modify your investment strategy to align with your new circumstances.

In conclusion, investment time horizon is a key factor that greatly impacts your investment decisions. By understanding how it influences risk, growth potential, and strategy, you can make more informed choices that align with your financial goals. Remember, investing is a long-term game, and having a clear understanding of your investment time horizon will set you on the path to success.

Thank you for reading our blog post on investment time horizon. We hope you found this information valuable for your investment journey. Stay tuned for more insights and tips from our Finance category!

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What Is the Relation Between Investment Horizon and Returns?

Written by True Tamplin, BSc, CEPF®

Reviewed by subject matter experts.

Updated on June 23, 2023

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Table of contents, investment horizon and return: overview.

Investment horizon refers to the total length of time an individual expects to hold an investment before liquidating it.

Depending on the investor's financial goals and risk tolerance, it could range from a few days or weeks (short-term), several months or years (medium-term), to decades or even a lifetime (long-term).

On the other hand, returns represent the gain or loss made on an investment. This could be in the form of capital gains, interest , dividends , or any investment-generated income .

They are usually expressed as a percentage and are considered a measure of an investment's success or failure.

The relationship between the investment horizon and returns is usually positive and direct. Simply put, the longer the investment horizon, the higher the potential for returns, provided the risks are well managed.

This is primarily due to factors such as the time value of money , the power of compounding, and the ability to weather market cycles.

Direct Relationship Between Investment Horizon and Returns

Understanding this relationship requires an examination of two fundamental financial concepts: the time value of money and the compounding effect.

The Time Value of Money

This principle asserts that a dollar in hand today is worth more than a dollar to be received in the future. This is primarily due to the potential earning capacity of money, which gives rise to the concepts of future and present value of an investment.

Future Value of Investment

The future value (FV) of an investment refers to the amount an investment is expected to be worth at some point in the future. The FV is determined by the initial investment amount, the rate of return , and the duration of the investment.

For example, if you invest $1000 today in a savings account that yields an annual interest rate of 5%, the future value of your investment after one year would be $1050. Extend that to five years, the investment would grow to approximately $1276.

This simple calculation underscores the positive effect of the length of time on investment. The longer the investment horizon, the greater the future value, given a constant interest rate .

Present Value of Investment

Conversely, the present value (PV) represents the current worth of a future sum of money or cash flow, given a specified rate of return. This is where the concept of discounting comes into play.

For instance, what would be the value of $1050 to be received a year from now if the discount rate is 5%? The present value, in this case, would be the $1000 that you initially invested.

This might lead you to question, why is a dollar today worth more than a dollar in the future?

This is due to several factors: inflation , which reduces purchasing power over time, risk factors associated with future returns, and the potential earning capacity of money if it were invested or saved.

The Compounding Effect

Power of compounding in the long-term.

Compounding is the process where the value of an investment increases because the earnings on an investment, both capital gains and interest, earn interest as time passes.

In the early years of an investment, the compounding effect might seem insignificant. But as time goes on, the growth becomes more exponential because you're effectively earning returns on your returns.

For example, if you invested $1,000 at an annual interest rate of 5% compounded annually, in the first year, you'd earn $50. However, in the second year, you'd earn $52.5 because the interest is computed on the initial principal and the accumulated interest ($1,000 + $50).

Impact of Frequency of Compounding

Moreover, the frequency of compounding (how many times interest is added to the investment per time period) also affects the returns.

Suppose you invest $5,000 in a savings account for two years. If your bank compounds interest annually at a rate of 5%, you'd have $5,512.50 at the end of two years. However, if the bank compounds semi-annually, you would have $5,520.63.

While the difference might seem trivial for a short period and a small principal, over a longer investment horizon and a larger principal, the difference becomes quite substantial.

Therefore, a long-term investment with frequent compounding can dramatically boost returns.

Factors Affecting Investment Horizon

Risk tolerance.

Investors with a higher risk tolerance are generally willing to invest over a longer period. This is because the value of investments can fluctuate over the short term, but trends tend to smooth out over longer timeframes.

Investment Goals

For instance, an investor saving for retirement may be looking at an investment horizon spanning decades, allowing for long-term investments that can weather market cycles.

Conversely, if an investor's goal is to save for a down payment on a house within a few years, they would prefer a shorter investment horizon with investments that are less risky and more liquid.

Generally, younger investors have the advantage of time, enabling them to opt for a longer investment horizon. They have more years to recover from potential market downturns , which allows them to take on more risk for potentially higher returns .

In contrast, older investors nearing retirement might favor a shorter investment horizon to preserve their capital and maintain a steady income.

Financial Stability

Those who have a stable income and financial position can afford to take on riskier, long-term investments.

However, those facing financial uncertainty may opt for a shorter investment horizon, ensuring they have quick access to their investment if needed, thus maintaining liquidity .

Market Conditions

During a bull market , when prices are rising, investors might be inclined to extend their investment horizons, hoping for continued strong performance.

Conversely, investors might prefer to shorten their investment horizons to protect themselves from further losses when prices are falling.

Type of Investment

Equities and mutual funds , which often fluctuate in the short term but have historically provided strong long-term returns, typically require a longer investment horizon.

In contrast, bonds or fixed-income investments , which provide regular returns over a defined period, usually involve shorter investment horizons.

Investor's Knowledge and Experience

Seasoned investors, aware of market cycles and confident in their investment choices, may be willing to stick with a long-term investment horizon.

On the other hand, novice investors, uncertain about market dynamics, may prefer a shorter investment horizon to mitigate potential losses.

Effect of Investment Horizon on Return Volatility

Return volatility is a statistical measure of the dispersion of returns for a given security or market index. In simpler terms, it represents the degree of variation of a financial instrument's price over time.

Understanding the relationship between return volatility and investment horizon can help investors better manage their investment portfolios.

Short-Term Volatility vs Long-Term Stability

In the short-term, investments can be subject to significant volatility . This can lead to fluctuations in the returns an investor sees over a brief period.

Factors contributing to this short-term volatility may include sudden market changes, economic news, geopolitical events, or company-specific information.

These short-term changes can cause investors to react, often emotionally, which can exacerbate price swings.

Therefore, investments with shorter horizons are often perceived as riskier because there's less time to recover from any downturns.

On the other hand, when considering a longer investment horizon, these short-term fluctuations tend to even out, leading to more stable returns.

Over the long term, investments often have the opportunity to recover from downturns, and the effect of positive years can offset negative ones.

Thus, long-term investing can often help reduce the impact of price volatility and offer a higher probability of positive returns.

Mitigation of Short-Term Market Risks in Long-Term Investment

Investors with a longer investment horizon can generally afford to take on more risk, as they have more time to recover from potential losses.

For instance, a downturn in the stock market may not be as concerning for an investor who doesn't plan on touching their investment for 20 years compared to someone nearing retirement.

It's also worth noting that a longer investment horizon provides the flexibility to adjust the investment strategy based on changes in financial goals, market conditions, or personal circumstances.

This could involve rebalancing the portfolio or adjusting the asset allocation to align with changing risk tolerance or financial needs.

Techniques to Maximize Returns Based on Investment Horizon

Strategic asset allocation.

Strategic asset allocation refers to setting a target allocation for various asset classes , such as stocks , bonds, and cash equivalents , and regularly rebalancing the portfolio to maintain these allocations.

This strategy is based on the investor's risk tolerance, financial goals, and investment horizon.

For instance, if you have a longer investment horizon and a higher risk tolerance, you might choose a more aggressive allocation, such as 70% stocks and 30% bonds.

On the other hand, if you have a shorter investment horizon and a lower risk tolerance, you might opt for a more conservative allocation, such as 40% stocks and 60% bonds.

Dollar-Cost Averaging (DCA)

Dollar-cost averaging (DCA) is an investment technique that involves consistently investing a fixed amount of money in a particular investment at regular intervals, regardless of the investment's price.

This approach can mitigate the impact of volatility and reduce the risk of making a large investment at the wrong time.

By investing a fixed dollar amount on a regular basis, you buy more shares when prices are low and fewer shares when prices are high, which can result in a lower average cost per share over time.

This strategy is especially beneficial for long-term investors who are looking to build wealth gradually and reduce the impact of short-term market fluctuations.

Diversification and Risk Management

Diversification is a strategy that involves spreading your investments across various asset classes and within different sectors to minimize risk.

The goal of diversification is not necessarily to boost performance but to balance the risk and reward in your portfolio by investing in different areas that would each react differently to the same event.

While it's unlikely that all investments will perform poorly at the same time, it's also rare that they'll all perform well.

In a well-diversified portfolio , any losses incurred by some investments should be mitigated by gains in others. Therefore, diversification can potentially lead to more stable returns over the long run.

Lastly, risk management is essential in investing. This can involve setting stop-loss orders, regularly rebalancing your portfolio to maintain your target asset allocation, and adjusting your investment strategy based on changes in your financial circumstances or risk tolerance.

Final Thoughts

Investment horizon and returns are closely linked, with longer investment horizons generally offering greater potential for higher returns. Factors such as the time value of money and the compounding effect contribute to this relationship.

The time value of money highlights the worth of a dollar today compared to the future, considering factors like inflation and potential earning capacity.

Meanwhile, the compounding effect demonstrates how returns can grow exponentially over time, particularly when investments are held for longer periods.

Various factors influence the choice of investment horizon, including risk tolerance, investment goals, age, financial stability , market conditions, and the type of investment.

Investors with higher risk tolerance, long-term goals, and stable financial positions are more likely to opt for longer investment horizons.

Conversely, those with shorter-term goals, lower risk tolerance, financial uncertainty, or limited experience may prefer shorter investment horizons.

Understanding the impact of investment horizon on return volatility is crucial, as short-term investments tend to be more volatile while longer-term investments offer more stability.

Employing techniques such as strategic asset allocation, dollar-cost averaging, diversification, and risk management can help maximize returns based on the investment horizon.

What Is the Relation Between Investment Horizon and Returns? FAQs

How does the investment horizon affect investment returns.

The investment horizon and returns have a positive relationship. Generally, a longer investment horizon allows for the potential of higher returns. This is because longer time frames provide opportunities for the power of compounding and the ability to ride out market cycles, resulting in potentially increased investment gains.

Is there a specific investment horizon that guarantees higher returns?

While there is no guarantee of higher returns based solely on the investment horizon, a longer investment horizon often provides more time for investments to grow and recover from market downturns. However, it is crucial to consider factors such as risk tolerance, investment strategy, and the specific investment itself when aiming for optimal returns.

Why is diversification important when considering investment horizons?

Diversification is vital regardless of the investment horizon as it helps mitigate risk. However, it becomes particularly important for longer investment horizons. By spreading investments across different asset classes and sectors, investors can reduce the impact of market volatility and increase the likelihood of achieving more stable returns over the long term.

Can a shorter investment horizon still yield significant returns?

While longer investment horizons generally have the potential for higher returns, shorter investment horizons can still yield significant gains depending on various factors. Short-term investments may focus on specific market opportunities or strategies, leveraging market volatility for potential profits within a limited timeframe.

Does a longer investment horizon always guarantee a positive return?

While a longer investment horizon increases the potential for positive returns, it does not guarantee them. Investments are subject to market fluctuations and various risks. Proper diversification, risk management, and diligent investment selection are important considerations regardless of the investment horizon to enhance the chances of achieving positive returns.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide , a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University , where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon , Nasdaq and Forbes .

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The long and short of investment horizon risk

The world of investing comes with many funny terms and phrases that don’t often appear in everyday conversation. One of those terms is investment horizon, which can be a confusing way of saying a very simple thing. But what is an investment horizon and what does it mean in relation to your investments?

What is investment horizon? In the simplest terms, an investment horizon is how long you’re planning on investing for. This timeline is unique to you and is decided by your circumstances, goals, and even to an extent your age. So, for example, your investment horizon could be 30 years or more if you’re planning on investing for your retirement, but it could also be 5 years if you’re saving to buy a house.

There’s no magic number for choosing how long you should be invested for, it all depends on you, although there is a lot of evidence to show that taking a long-term approach can pay off in the long run. For example, people who invested in the FTSE 100 and remained invested for any 10-year period, between 1984 and 2020, have had an 89% chance of making a gain. [1]

How long you’re planning on investing for may impact the level of risk you’re willing to take.

Investment Time vs Risk Generally speaking, how long you’re planning to invest for can play an important role in deciding the amount of risk you’re willing to accept. If someone’s only looking at investing for a few years, or even less, they may be uncomfortable seeing their investment plan balance going up and down. Low risk portfolios would not be as prone to market movements, which may be more acceptable to people with short-term horizons. However, some people may have plenty of time to wait for markets to recover. Higher risk portfolios, which tend to be more volatile, could be an option for people with a longer-term horizon. But this will depend on each person’s financial situation and what risk they are willing to take.

Having time on your side doesn’t mean that the risk isn’t there, it just gives you a buffer between current performance and when you want to sell your investments. Think of it as being able to potentially wait out the hard times.

Can you have multiple investment horizons? Yes, it’s not uncommon to have several investment horizons. For example, you may be saving into your pension for a much longer time than you may be for your new house, wedding, dream holiday, or vintage car fund. In this sense, you can definitely be a long-term investor with short-term investments, and that’s not necessarily a bad thing either.

Ultimately, what you are saving for is a key factor in how long you’ll be invested for. And it isn’t unusual for these time scales to change – for example, an unexpected arrival may mean that you need to move to a bigger house sooner, or your dream car suddenly becoming available could prompt the sale of your investments.

You could choose to split your investments across a number of different plans and account types, for example, saving for retirement in a personal pension , building up your house deposit in a Stocks and Shares ISA , or giving your child a financial head start with a Junior ISA . This could be a good way to apply different levels of risk to all of your financial goals, if you wanted to.

At Wealthify, we know that every investment journey is different – even if it’s your own. One of the ways we’ve made investing easier for you is by letting you split your ISA across several different plans, which you can adjust as you see fit. Pick an investment style that suits your needs, choose ethical or original, and invest for as long as it takes to achieve each of your goals.

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1: Data from Bloomberg

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Understanding Time Horizons of Alternative Investments

• 29 Jul 2021

There are several factors to consider when evaluating investment opportunities, such as volatility, expected returns, and risk tolerance. Another critical factor is time horizon. An investment’s time horizon, or longevity, can vary depending on the type of investment and the investor’s goals. It’s arguably the most important factor to take into account: For an investment to be successful, your strategy must allow you to access your money when you need it, however soon or far out that may be.

What Is an Investment Time Horizon?

An investment time horizon is how long an investor expects to own a particular security, or investment. Time horizons vary for different investment strategies—from a few days or hours to potentially decades.

Generally, a longer time horizon is more conducive to a riskier investment or set of investments, as it allows more time for the market to recover from any setbacks and for the investor to realize a gain. Investing, at its core, is a balance of risk and reward—you can forgo having access to cash for a certain amount of time with the expectation that it will later be returned to you with a premium for giving it up. Usually, the longer you give up your cash, the more you can expect to earn back.

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Types of Investment Time Horizons

Time horizons vary and are often dictated by investment goals or strategies, which are closely related to liquidity. At the end of an investment’s time horizon, it’s fully liquid, or able to be cashed out or traded. Prior to an investment’s maturity, it’s illiquid, or unable to be accessed by the investor. Investors factor in liquidity when choosing which investments best suit their time horizon goals.

For retail or individual investors, time horizons can be dictated by a particular savings goal, such as retirement or purchasing a home. Institutional investors, however, are generally long-term investors, as organizations like pensions or endowments exist to provide returns for decades, if not indefinitely.

The structure of an investment makes it suited for different longevities, and trying to cut it short or extend its length can result in subpar performance. Additionally, there’s an opportunity cost: Not maximizing one investment might mean you could have better invested your money elsewhere.

The simplest investments with regard to time horizons have preset maturity dates. Bonds, for example, are designed to mature on a certain date, and investors purchase them knowing the exact date their money will be returned.

Other types of investments, however, can be more complicated. For example, when you purchase a stock, you can turn around and sell it at any time. But the stock market fluctuates constantly, so how do you know if you want to sell your stock the next day or the next year? These determinations depend on various factors, including when you need your money back and how you expect the market to perform in the future.

What Do Time Horizons Mean For Alternative Investments?

Alternative investments are generally much more illiquid than traditional investments, which means they’re only suitable for investors willing to invest cash over a long period.

For example, venture capital funds typically last for approximately 10 years. Investors commit a certain amount of money to a venture capital firm that invests it over the next decade, along with other contributors to the fund. While investors may receive payouts during that period—depending on the fund’s exit events—they enter the fund understanding they may not have access to investments for several years.

Real estate is another type of alternative investment that requires an investment strategy with longer time horizons. Historically, real estate has offered valuable opportunities for those willing to wait for hot market conditions. One only needs to look at the soaring price of housing in the United States during recovery from the coronavirus (COVID-19) pandemic to realize there’s money to be made by selling a house in 2021 versus 2019. The same holds true for institutional investors that, on average, hold real estate investments for an average of 7.6 years .

There are many elements of real estate that prevent it from being a quick turnaround investment, such as complicated financing or years-long lease terms. For these reasons, only investors with longer time horizons should consider adding real estate investments to their portfolios.

How Alternatives Differ From Traditional Investments

It’s important to note that traditional investments, too, can be advantageous for investors with longer time horizons. For example, one could simply purchase a stock and hold on to it for decades. The difference with stocks, however, is that the investment is much more liquid because the investor could choose to sell the stock for cash at any time. In the case of alternatives, this option might not exist.

Using Alternatives to Serve Longer Investment Time Horizons

There are many factors to consider when thinking about investment time horizons, including your age, liquidity needs, upcoming life events (such as retirement or buying a home), or the goals and needs of clients and partners (if you’re an institutional investor). For those with longer time horizons, alternatives offer a promising way to diversify portfolios, as the concession of giving up access to cash in the short run can result in higher returns in the long run.

The Importance of Investment Time Horizons

While investments can be measured in many ways, they cannot enhance your portfolio unless they provide access to your money when you need it; understanding time horizons is crucial to ensuring success. To learn more about how alternatives differ from traditional investments and the unique advantages they offer, consider taking an alternative investments course to learn strategies for building and diversifying portfolios.

Are you interested in expanding your knowledge of alternative investments? Explore our five-week online course Alternative Investments and other finance and accounting courses . Not sure which is right for you? Download our free course flowchart .

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How to find your investment horizon.

Your investment horizon is the time you expect to hold investments in your portfolio. Along with risk tolerance, expected rate of return, starting balance and anticipated future contributions, investment horizon is one of the key considerations guiding asset allocation and portfolio management. Investment horizon is commonly measured in decades, years and months but may be weeks, days, hours or even seconds. When the investment horizon is reached, an investor will plan to liquidate the investment and use the proceeds to accomplish the objective. Common objectives include paying for retirement, purchasing a home and retiring debt.

A financial advisor can help you account for investment horizon in your portfolio.

Investment Horizon Basics

Investment horizon, also referred to as time horizon , is one of the fundamental considerations used to construct and manage an investment portfolio. Others include risk tolerance , investment objectives and expected rate of return . Investment horizon influences and is influenced by each of the others.

Investment horizon particularly impacts risk and rate of return. When an investment will be held for a longer period of time, the investor can generally take on more risk. Riskier investments typically yield higher rates of return. For instance, an investor with a long investment horizon, such as one measured in decades, can put more money into higher-yielding but more volatile stocks as opposed to bonds, which typically generate lower returns but may be less susceptible to losses.

Choosing the wrong investment horizon can cause an investor to fall short of the objective. For instance, if an investor chooses a too-short horizon and invests in more volatile assets, the investment may have to be sold during a market downturn. This can result in failure to reach the objective or, at the least, delay in reaching the objective. Similarly, choosing a too-long investment horizon may mean the investor over-emphasizes assets with lower returns, causing needless delay in accumulating sufficient assets to fulfill the objective.

Typical Investment Horizons

Retirement is a common investment horizon, and many retirement savers measure their investment horizons in decades. Very active investors, such as high-frequency traders , on the other hand, may anticipate holding a given investment only overnight or, sometimes, even for a few hours, minutes or seconds.

For asset allocation, investors often refer to three general types of investment horizon:

Short-term –  This usually means less than three years and could include saving for a down payment on a home.

Medium-term –  This could mean three to seven years and might refer to paying off student loans or other debt.

Long-term –  Seven years and longer is often a time frame used for investing to fund retirement.

Investors typically have multiple investment horizons, each addressed by parts of the portfolio. For instance, funds to be used for a short-term horizon might be placed in safe assets such as government bonds, Medium-term horizons could be addressed by a mix of assets favoring fixed-income securities.

Other Investment Horizon Concerns

Liquidity is a key component of a plan addressing investment horizons. Since the plan is to liquidate the asset when the investment horizon is reached, it’s essential that the asset be readily liquidated. Stocks are highly liquid, since they can be sold any time. Other assets, such as real estate, are much less liquid and may not be suitable for shorter investment horizons.

Additional investment horizon factors to include:

Investment length. Younger investors often have longer investment horizons than older investors, especially for objectives such as retirement.

Retirement age. The planned retirement age is the investment horizon for retirement savers.

Investment amount. If a higher-earning investor can plan to make sizable future contributions to the portfolio, it can significantly shrink investment horizon.

Risk tolerance. Investors who are in for the long haul can take more risk, all else equal, but some investors have a fundamental adversity to risk, which can extend their investment horizon.

Disposable income. An investor who chooses to devote more disposable income to maintaining a comfortable lifestyle may also be choosing to extend his or her investment horizon.

Special objectives. Buying a second home, paying for a child’s college tuition, hosting a wedding and other special goals objectives can also have an affect on overall asset allocation and management.

Special situations. Future inflows of funds from sources such as an inheritance or sale of a business can also shorten investment horizons.

Bottom Line

Investment horizon is a key concern when allocating assets and managing an investment portfolio. Many investors will have multiple investment horizons, each designed to accomplish a specific financial objective. A balanced portfolio with a blend of stocks, bonds and other assets is often necessary to address the various investment horizons.

Investment Planning Tips

A financial advisor can help you select a time horizon for your investments. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now .

Use SmartAsset’s free online Investment Calculator to help you determine a realistic investment horizon for your financial objectives. It begins with the starting amount you have to invest, the amount and frequency of additional contributions and rate of return in order to tell you how much your investment will be worth after a set number of years.

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Investment Time Horizons: From Short to Long-Term Investments, Risks, and Strategies

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Understanding investment time horizons, what are investment time horizons, why are investment time horizons important, short-term investment horizon.

• Money Market Funds
• Savings Accounts
• Certificates of Deposit (CDs)
• Short-Term Bonds

Medium-term investment horizon

Long-term investment horizon.

• Risk tolerance: Longer horizons enable investors to tolerate higher levels of risk, potentially leading to more substantial gains.
• Flexibility: Diversifying investments across various horizons can provide flexibility to meet different financial goals.
• Market volatility: Longer horizons can expose investors to market volatility, which may require patience during downturns.
• Illiquidity: Longer horizons may tie up funds that could be needed for emergencies or unforeseen expenses.
• Risk of overcommitment: Prolonged horizons can lead to overcommitment to high-risk investments, potentially resulting in significant losses.

The bottom line

Frequently asked questions, what is the ideal investment horizon, can i change my investment horizon, how does inflation impact investment time horizons, are there tax implications based on investment horizons, is there an optimal mix of investments for different horizons, key takeaways.

• Investment time horizons determine how long you plan to hold investments before needing access to funds.
• Short-term horizons are ideal for immediate financial needs, while long-term horizons can leverage the power of compounding for higher returns.
• Each horizon has its pros and cons, impacting risk tolerance and investment choices.
• Investment strategies can be adjusted over time to align with changing financial goals.

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A time horizon is a way to assess your risk tolerance or risk capacity as an investor. At its core, a time horizon provides the answer to a critical question: When do you need this money?

Time horizon example

One investing goal that nearly everyone shares is a comfortable retirement. Normal retirement age is 67, but let’s say you want to retire a bit earlier at the age of 65. If you’re 30 years old in 2022, your time horizon encompasses the 35 years between now and 2057. Earlier in your career, you’ll need to accept bigger risks with your investments to accelerate your growth and feel comfortable enough to leave the workforce in 2057.

When thinking about retirement, though, it’s important to recognize that you’ll need to think about another time horizon. You don’t need all the money on the day you retire. Depending on your health and your history of family longevity, your money may need to last approximately 30 additional years. Bankrate’s retirement calculator can be a helpful resource to understand how long those retirement savings can last.

Common time horizons

Since you have multiple objectives for your money, you will think about a range of different investment time horizons at once. From working toward a new car purchase to planning to buy a vacation home, you will need to evaluate each of your goals with the calendar in mind. Here are three common time horizons.

Short-term time horizon

A short-term time horizon refers to money you will need to access soon. An example of a super short-term horizon is your emergency fund , which you can park in a high-yield savings account or money market account .

If an unexpected, worst-case scenario arises tomorrow, you will need your money immediately to cover some expenses. There are other financial needs that fit into the short-term horizon category, albeit with a slightly more distant horizon.

If you’re saving for a down payment on a house , you might be aiming to reach your goal before the lease on your rental apartment is up in 11 months. You can’t afford to lose value, but some extra growth would certainly help. Perhaps you’ll put the money in a short-term certificate of deposit to take advantage of a bump in interest earnings.

Medium-term time horizon

What fits into a medium-term time horizon may vary based on how you look at your objectives, but these tend to be somewhere between five and 10 years away.

For example, if you are saving for college for your 10-year-old, you will need to begin pulling money out for tuition bills in the next eight years. With a longer lead time, you can accept some room for risk, but you will likely have a mix of investments that don’t leave you too exposed to major losses. For example, you might diversify your investments between stocks and lower-risk bonds.

Long-term time horizon

When you think about major goals further away from the present, you are operating on a long-term time horizon. As a younger investor , retirement is the most obvious example of a long-term horizon.

If you’re in your 20s or 30s, you have decades of work ahead. The longer you have, the more you can afford to deal with the risks of loss in your investment portfolio.

Why understanding your time horizon is so important

Knowing your time horizon is essential for outlining an investing strategy that meets your goals. The time horizon will dictate a very important distinction: the return of your investment versus the return on your investment. With a shorter time horizon, your focus is tilted toward the return of it; you want to make sure you can get your initial investment back. For example, if you know you need the money next year, you don’t have a lot of time to grow it — and you don’t have a lot of room to risk losing it.

If your time horizon is longer, though, you’ll be thinking about the common definition of ROI: a return on your money. The luxury of extra time will let you stomach more volatility to chase higher returns.

How to determine your investing time horizon

Understanding your investing time horizon begins with determining when you’ll need this money. Bankrate’s simple savings calculator can give you an idea of how much you would need to save over that time, at an average annual return, to accumulate what you need.

Remember that as your time horizon changes, so will your investment allocations. When the date you need your money is closer on the calendar, you will need to adopt a more conservative approach. For example, at 25, your retirement has a long-term horizon. At 60, the money you’ll need to withdraw in the first few years of retirement will have a short-term horizon. You’ll become less focused on growth and more concerned about avoiding any losses.

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Investment horizon

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An investment horizon refers to the length of time an investor expects to hold an investment or the duration over which they plan to achieve their financial goals through investing.

What is an investment horizon?

An investment horizon is a critical consideration when making investment decisions because it helps determine the appropriate investment strategy, asset allocation , and level of risk that an investor can tolerate.

Here are some key points about investment horizons:

1. Short-term horizon : Investors with a short-term horizon typically plan to hold their investments for a relatively brief period, often a year or less. They may be looking for quick profits or have specific financial goals that need to be met in the near term, such as buying a car or funding a vacation.

2. Intermediate-term horizon : Investors with an intermediate-term horizon usually plan to hold their investments for a few years but not necessarily for the long term. This horizon is common among individuals saving for medium-term goals like paying for a child’s education or a down payment on a house.

3. Long-term horizon : Long-term investors have a horizon that extends many years into the future, often decades. Their primary focus is typically on retirement planning, wealth accumulation, and achieving long-term financial objectives. Long-term investments are more likely to be in assets like stocks, real estate, or retirement accounts.

4. Risk tolerance : An investor’s risk tolerance often aligns with their investment horizon. Short-term investors may prefer lower-risk, more stable investments to protect their principal, while long-term investors may be willing to accept more volatility and higher risk in exchange for potentially greater returns over time.

5. Asset allocation : The choice of assets in an investment portfolio is heavily influenced by the investor’s horizon. Short-term investors may allocate a larger portion of their portfolio to cash or fixed-income securities, while long-term investors may have a higher allocation to equities or growth-oriented investments.

6. Diversification : Diversification , or spreading investments across various asset classes and geographic regions, is a risk management strategy that can be tailored to an investor’s horizon. It helps reduce the impact of market fluctuations and unexpected events.

7. Monitoring and adjustments : Investors should periodically review their investment portfolio to ensure it remains aligned with their investment horizon and financial goals. Adjustments may be necessary if goals change or if market conditions warrant a shift in strategy.

It’s important for investors to have a clear understanding of their investment horizon because it guides their investment decisions and helps them manage risk appropriately. Additionally, an individual’s horizon can evolve over time as their financial goals and circumstances change, so it’s advisable to periodically reassess and adjust investment strategies accordingly.

Example of investment horizon

Sarah, an individual investor, is planning to invest in the stock market to achieve her financial goals. She has two main financial goals:

• Short-term goal : Save for a down payment on a house within the next 3 years.
• Long-term goal : Build a retirement fund to support her during retirement in 25 years.

Sarah regularly monitors her investment portfolio and makes adjustments based on changes in market conditions, her financial goals, and her risk tolerance.

As the short-term goal approaches, Sarah gradually shifts her investment allocation to more conservative assets to protect her savings. For the long-term goal, she may take advantage of market opportunities and adjust her portfolio accordingly.

In this example, the investment horizon is a crucial factor influencing Sarah’s investment decisions. By aligning her investment strategy with her short-term and long-term financial goals, Sarah can optimise her portfolio for different timeframes and risk tolerances.

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What Is an Investing Time Horizon?

• Investing time horizons describe how long someone is interested in investing their money.
• You can have short-term, medium-term, or long-term investment horizons.
• The risk you can handle is also closely related to your investment horizon.
• Motley Fool Issues Rare “All In” Buy Alert

If you're new to investing or trying to change how you invest to be more efficient and coordinated, perhaps the most important concept to understand is the investing time horizon. Beyond all other things, your investing time horizon will help determine what you invest in and how.

What is it?

What is an investing time horizon.

An investing time horizon is the time you have to reach your investment goals . It sounds pretty simple, but it can require a lot of patience and thought to choose the right investment and hold it for the right length of time. Most people have different investing time horizons for different goals or adjust their strategies and horizons as time passes.

Your investing time horizon also depends on what kind of investment interests you and how much time you will need to reach your goal. For example, The Motley Fool recommends a five-year investing time horizon for anyone investing in stocks . But if you want to invest in certificates of deposit (CDs) , for example, you may still get a decent return from a very short investing time horizon -- often as short as six months to a year.

How are investing time horizons defined?

Investing time horizons aren't set in stone, but there are some loose definitions surrounding the general consensus:

• Short-term investment time horizon. This is a very short investment period, ranging from a few months to no more than five years. Three years is a pretty typical short-term investing time horizon for very safe investments.
• Mid-term investment time horizon. Most mid-term investments are held from three to 10 years, although some may define this period as five to 10 years. This period allows for some risk , depending on the investment that interests you. Stocks can easily rally in this period, even if they wobble during the first year or two of ownership.
• Long-term investment time horizon. Long-term investments are those held for 10 years or longer. Long-term investors are generally pursuing retirement savings, although that isn't always the case. With a long investment horizon, you can afford to take some pretty big risks, as long as your entire portfolio isn't a cliff-hanger.

Choosing one

Choosing an investing time horizon.

Your investing time horizon should correspond with the amount of time you have to reach your investment goal. For example, if you're saving for a vacation you've planned to take in three years, you might as well get some interest with your savings. This would be a great match to a mutual fund , which will provide a remarkably safe harbor for your money and help it grow.

The risks you take with your money depend greatly on how much time remains for your portfolio to recover if something unforeseen happens in the economy or the stock market. If you have a very long investment time horizon, you could even survive a bear market , confident your investments will rebound. This amount of risk helps your investment grow more quickly, although it does create a true chance for loss.

Of course, you can use safer investments on a longer time horizon, too, but you miss out on a great deal of growth opportunity by being too cautious. There's always a balance between risk and investing time horizon, and it's different for everyone.

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Why they matter

Why do investing time horizons matter to investors.

Investing time horizons matter to investors because they help them choose the right investments for their goals. Most investors will have investment mixes with different time horizons. For example, a long-term stock investor will likely pair their stock portfolio with a medium-term bond portfolio and keep extra cash in a mutual fund or CD so that the money can grow beyond what's possible with a standard savings account.

By mixing and matching investing time horizons and understanding the time frames that make the best sense for different kinds of holdings, you can truly maximize what your money can do in the longer term. Since most investors worry primarily about retirement, the goal for once is to actually be the kid with the most toys at the end. Understanding investing time horizons will make that possible, no matter how much you start with.

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What Is Your Investing Time Horizon?

Updated: May 3, 2023, 7:44pm

Time horizon describes the amount of time that passes before people need to access the money that’s tied up in their investments. Understanding your time horizon is one of the critical factors that determines how you invest your money in the first place.

The more time that passes before you need to convert investment assets to cash, the more volatility and risk you can tolerate. That’s because you’ll have a greater ability to recover from any market downturns that may happen along the way.

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Time Horizon Is the Key to Your Investing Strategy

Outlining your goals is the first step in the investing process, no matter how much money you have at your disposal. Once you understand your goals, you can decide how much time you need to achieve them.

Once you’ve nailed down your financial goals and time horizon, you can decide on the types of investment assets and rates of return required to hit your targets.

Should you opt for growth stocks , which appreciate rapidly but also deliver lots of volatility along the way? Will slower growing stocks and funds get the job done?

Or would you prefer to keep your money in cash and bonds to protect the principal no matter what’s going on in the markets, sacrificing growth for the sake of stability?

Different types of assets behave differently in various market and economic environments. Which one or more types of assets you use depends on your goals and on your stomach for volatility. But more than anything, it depends on your time horizon.

Different Time Horizons for Different Goals

Beyond goals, your age, income and lifestyle play a big role in determining your investment time horizon. Most people will set a range of time horizons for different investing objectives.

The common rule of thumb is that the longer the time horizon, the more money you should allocate to stocks, equity funds and other risky investments.

“For many investors, a short time horizon is anything up to three years,” said Andrew Schrage, co-founder and CEO of MoneyCrashers.com. “A medium time horizon falls between three and 10 years. A long time horizon is anything longer than 10 years.”

Short-term Investing Time Horizon

Investors with a short-term time horizon—one to three years—can’t afford to take on a significant amount of risk. That is, they can’t afford to take a chance that they might lose much of their principal, because there won’t be enough time to make up for the losses.

An older investor who is in the final stages of preparing for retirement may have a short time horizon and is likely to be highly risk averse. After all, they will soon need to fund their living expenses from assets rather than from a paycheck.

A young couple planning to buy a home within a specific period like two months may also have a short time horizon. They’re counting on being able to write a check for a down payment for a set dollar figure.

If your time horizon is short, consider parking your money in cash or investments that behave like cash. The key here is to choose assets that preserve principal and are readily accessible, which is often referred to as being liquid. These include short-term Treasurys, certificates of deposit (CDs) and money market mutual funds .

Medium-Term Investing Time Horizon

Investors with a medium-term time horizon–three to ten years–can afford to take on moderate levels of risk and volatility. They can invest in a conservative and diversified portfolio that allows for asset appreciation.

A mixture of stocks and bonds is appropriate, but the level of allocation to stocks varies, depending on your individual risk tolerance. Investing to fund a child’s college education could be medium-term goals, for instance.

To be safe, towards the end of such a time horizon, you could shift more of your assets into short-term time horizon assets.

Long-Term Investing Time Horizon

If your time horizon is ten years or longer, you can assume significantly more risk for the potential of higher returns. That’s because your investments will have more time to rebound from any short-term downturns.

Long-term investors should tilt their asset allocation heavily toward equities, with fixed income and other non-correlated assets used for diversification. Many long-term investors are saving for retirement, typically in a 401(k) account, individual retirement account or another tax-advantaged vehicle.

In what is known as lifecycle investing, younger investors with many years to retirement should allocate a high proportion of their portfolios to stocks. Over time, as the investor ages, they will allocate progressively less to equities and more to fixed income.

Aggressive investors with a high tolerance for risk may also engage in extremely short-term strategies employing technical analysis or complex instruments such as derivatives.

Factors That Impact Your Investing Time Horizon

There are many factors that can affect an investor’s time horizon beyond the most obvious–an investor’s age and how much time they have before reaching their investment goal, such as retirement.

Relative Wealth

Comparatively wealthy investors with larger investment balances can afford aggressive investments over a shorter time horizon. Why? Because they will still be able to afford their short-term goals even if their principal shrinks amid market turbulence.

If you can afford to plow more extra income into your investments than you lose temporarily due to a market decline, you can act as if your time horizon is long even if it is not.

Bad Spending Habits

What about investors who believe that all of their financial goals are many years in the future? They think of themselves as long-term investors, but what if they spend, spend, spend on near-term indulgences but barely have enough money to pay the bills?

Investors in this category cannot afford loss of principal from market setbacks. Volatility is their enemy. Whether they know it or not, these investors have a short investment time horizon.

Risk Tolerance

Risk-averse investors are not interested in getting better returns in exchange for risking loss of principal, and they generally prefer more liquid assets.

If you are more risk averse, you may want to own safe assets more tailored to short-term investing goals, but hold them over the longer term to achieve your objectives.

Multiple Goals

What if you have multiple goals, each with a different time horizon? In that case, you may have to juggle investments with different time horizons.

If your assets are limited (whose aren’t?), the overlapping goals can shorten the time available for meeting each one’s financial demands. The spaghetti tangle of goals can shorten your time horizon for building up enough money to pay for each goal as it comes due.

Special Situations

What about the lucky few who receive an unexpected windfall? An inheritance or a lottery win? Maybe an investment that pays off beyond your wildest expectations.

Whatever the wonderful circumstances, the end result is that your time horizons get longer. Having more money is the same as having more time. You can better absorb performance setbacks in your investments. And that’s the same thing as having more time for your investments to recover on their own.

Like the old saw goes, time is indeed money.

You Can Have Multiple Investment Time Horizons

Let’s take another look at what happens when you have multiple goals at the same time. Consider a young couple who married not long ago. Both were 30 years old, and their goal was to retire at 65. That gave them 35 years to contribute to their retirement accounts and benefit from the miracle of compounding.

Two years later, they became parents of twins. Now that they are a family of four, they decide they should move into a new home in three or four years. This also means they must balance their long-term retirement savings goal with the medium-term goal of saving for a down payment.

They also want to establish a college fund for the children, another long-term goal. Further, they decide to purchase a car, their first, in eight months. Some number crunching showed them they can lower their monthly car-loan bills by making a down payment of at least $5000.

For the short-term goal of saving for the car, they would consider allocating a portion of their monthly paychecks to an extremely low-risk and liquid money market fund . For their kids, they could start a 529 college savings plan. They can fund it by diverting some of their 401(k) contributions.

Both the 529 and 401(k) plans are intended to pay for long-term goals. The parents are still more than three decades away from retirement. And the twins are 17 years away from matriculating. So both the 529 and 401(k) plans would be invested entirely in stock funds.

Their home down payment is another medium-term goal. For that, the young couple should invest in government debt with short- to mid-term maturities like Treasury bills and notes. Those should generate a modest return with little to no risk of loss of principal within the near future.

Balancing Risk and Reward Over Time

When considering what types of investments are suitable for your time horizon, it’s also important to consider risks specific to certain types of investments.

Savings accounts , money market funds, CDs and other short-term investments offer very low returns because of their low level of risk in the short run. There’s little if any chance that they’ll lose principal.

However, if the rate of inflation is higher than the return, the longer you remain invested in these instruments, the more value you will lose. A key role of stocks and stock funds is to outrun inflation in the long term. Still, in the short run, stocks and stock funds can see-saw up and down in value.

The Takeaway

Understanding your time horizon and how it relates to your financial goals is crucial for successful financial planning. It dictates what types of investments are best suited to achieving your objectives. It helps guide your decision-making by taking into account factors such as risk tolerance and liquidity needs.

Knowing how much time you have before needing access to funds will help identify which investments are right for you. If you have the time and inclination, you can make your own financial plan and pick appropriate investments. Managers of mutual funds and ETFs shoulder much of the heavy lifting when it comes to picking investments.

If you want help, a financial advisor can help you understand your time horizon(s) and risk tolerance. An advisor can help you develop a financial plan, including an investment strategy, for achieving your financial goals.

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Your investment horizon is the duration for which you plan to hold an investment.

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Capital Growth

Secondary objectives, the bottom line, defining your basic investing objectives: what to factor in.

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

Basic Investment Objectives: An Overview

The options for investing your savings are always increasing but they can all still be categorized according to three fundamental characteristics: safety, income, and growth. The first task of any successful individual investor is to find the correct balance among these three worthy goals. The success of one can come at the expense of the others.

Key Takeaways

• An investment can be characterized by three factors: safety, income, and capital growth.
• Every investor has to select an appropriate mix of these three factors. One will be preeminent.
• The appropriate mix for you will change over time as your life circumstances and needs change.
• The best choice is often a mix of all three that meets your needs.

It's said that there's no such thing as an absolutely safe and secure investment but you can get pretty close. Investing in government-issued securities in stable economic systems is one. U.S.-issued bonds remain the gold standard. You have to envision the collapse of the U.S. government to worry about losing your investment in them.

AAA-rated corporate bonds are also considered safe. They're issued by large, stable companies. These securities are arguably the best means of preserving your principal while receiving a pre-set rate of interest.

The risks are similar to those of government bonds. IBM or Costco would have to go bankrupt to warrant worrying about losing money investing in their bonds.

Extremely safe investments are also found in the money market. Because of increasing risk, these securities include Treasury bills (T-bills), certificates of deposit (CDs), commercial paper, or bankers' acceptance slips.

But safety comes at a price. The returns are very modest compared to the potential returns of riskier investments. This is referred to as "opportunity risk." Those who choose the safest investments may be giving up big gains.

There's also interest rate risk to some extent. You could tie your money up in a bond that pays a 1% return then watch as inflation rises to 2%. You've just lost money in terms of real spending power. The very safest investments are short-term instruments, such as three-month and six-month CDs, for this reason. The safest investments pay the least of all in interest.

Investors who focus on income may buy some of the same fixed-income assets that are described above but their priorities shift toward income. They're looking for assets that guarantee a steady income supplement and they may accept a bit more risk to get there. Income is often the priority of retirees who want to generate a stable source of monthly income while keeping up with inflation.

Government and corporate bonds may be in the mix, and an income investor may go beyond the safest AAA-rated choices and go longer than short-term CDs. The ratings are assigned by a rating agency that evaluates the financial stability of the company or government issuing the bond. Bonds that are rated at A or AA are only slightly riskier than AAA bonds but they offer a higher rate of return. BBB-rated bonds carry a medium risk but more income.

You're in junk bond territory beyond these ratings and the word "safety" doesn't apply.

Income investors may also buy preferred stock shares or common stocks that historically pay good dividends.

By definition, capital growth is achieved only by selling an asset. Stocks are capital assets. Barring dividend payments, their owners have to cash them in to realize gains.

There are many other types of capital growth assets as well, from diamonds to real estate. They all share some degree of risk to the investor. Selling at less than the price you paid is referred to as a capital loss .

The stock markets offer some of the most speculative investments available because their returns are unpredictable. Blue chip stocks  are generally considered to be the best of the bunch because many of them are reasonably safe. They offer modest income from dividends and the potential for capital growth over the long term.

Growth stocks are for those who can tolerate some ups and downs. These are the fast-growing young companies that may grow up to be Amazons, or they might crash spectacularly.

The dividend stars are established companies that may not grow in leaps and bounds but pay steady dividends year after year.

Profits on stocks offer the advantage of a lower tax rate if they're held for a year or more.

Many individual investors avoid stock-picking and go with one or more exchange-traded funds or mutual funds that can give them stakes in a broad selection of stocks.

One built-in bonus of stocks is a favorable tax rate. Profits from stock sales are taxed at the capital gains rate if the stocks are owned for at least a year and this is less than the income tax rates paid by most investors.

Read about Investopedia's 10 Rules of Investing by picking up a copy of our special issue print edition.

Safety, income, and capital gains are the big three objectives of investing but there are others that should be kept in mind as well.

Tax Minimization

Some investors pursue tax minimization as a factor in their choices. A highly-paid executive may seek investments with favorable tax treatment to lessen the overall income tax burden. Contributing to an individual retirement account or any other tax-advantaged retirement plan is a highly effective tax minimization strategy.

Investments such as bonds or bond funds are relatively liquid. They can be converted into cash quickly in many cases and with little risk of loss. Stocks are less liquid because they can be sold easily but selling them at the wrong time can cause a serious loss.

Many other investments are illiquid. Real estate or art can be excellent investments unless you're forced to sell them at the wrong time.

When Do Treasury Bills Mature?

The maturity terms of Treasury bills (T-bills) range from four weeks to a maximum of one year. This makes them essentially short-term investments if your goal is to make some money by a time on the near horizon.

What Is a Junk Bond?

Junk bonds come with low scores from the primary raters: S&P, Moody's, and Fitch. These scores are typically less than BBB. Junk bonds are inherently risky for investors. They can be tempting because they often pay high interest but they run the risk of default so you could end up losing money despite the interest rate.

What Are the Capital Gains Tax Rates?

Capital gains tax rates are favorable if you hold an asset for at least one day more than a year. These are classified as long-term gains and most are taxed at rates of 0%, 15%, or 20%. These rates can be significantly less than your income tax bracket for the year but qualifying for each rate depends on your overall taxable income. Nonetheless, the IRS indicates that most taxpayers fall into the 15% category.

You can be liable for a capital gains tax when you sell an asset for more than you invested in it. You'll want to hold onto a profitable asset for at least one year and one day for more favorable long-term tax treatment. Otherwise, capital gains are taxed along with your other income according to your marginal tax bracket.

The answer doesn't lie in a single choice among safety, growth, or capital gains for most investors. The best choice is a mix of all three that meets your needs. And it will most likely change over time. Your appetite for capital gains may be highest when you're at the start of your career, and you can withstand a lot of risks, but you might prioritize holding onto that nest egg and dialing down the risk as you approach retirement.

Your portfolio will probably reflect one pre-eminent objective at any stage in life, with all other potential objectives carrying less weight in the overall scheme.

Federal Reserve Bank of St. Louis. " Moody's Seasoned AAA Corporate Bond Yield ."

U.S. Securities and Exchange Commission. " Certificates of Deposit (CDs) ."

Fidelity. " Bond Ratings ."

IRS. " Topic No. 409, Capital Gains and Losses ."

TreasuryDirect. " Treasury Bills: FAQs ."

New York State Attorney General. " Bond Investments ."

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