The long and short of investment horizon risk

You may have heard of the term ‘investment horizon risk’ when it comes to investing, but what does this mean and how does it impact you?
On the road and looking ahead | Wealthify
Reading time: 4 mins

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.

 

Reference:

1: Data from Bloomberg

Past performance is not a reliable indicator of future results.

Your tax treatment will depend on your individual circumstances and it may be subject to change in the future.

With investing, your capital is at risk, so the value of your investments can go down as well as up, which means you could get back less than you initially invested.

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