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An investment horizon is the length of time an investor expects to hold an investment before selling it. It can range from a few days to several decades, depending on the investor’s goals and strategy. The investment horizon influences the level of risk an investor is willing to take.
The investment horizon helps determine the appropriate asset allocation.
A longer investment horizon generally allows investors to tolerate more short term volatility, because there is more time to recover from market downturns. For example, younger investors saving for retirement may invest more heavily in stocks. A shorter horizon, such as saving for a home purchase in two years, often requires a more conservative approach with lower risk assets.
The investment horizon affects portfolio composition, risk management, and expected returns. Market fluctuations may have different impacts depending on how much time remains before the funds are needed.
Short example:
Suppose an investor plans to retire in 30 years.
Because the investment horizon is long, the investor chooses a portfolio with a higher proportion of stocks.
If another investor needs the money in one year, they may prefer bonds or cash to reduce the risk of short term losses.
Disclaimer: Investing brings risks. Our analysts are not financial advisors. Always consult an advisor when making financial decisions. The information and tips provided on this website are based on our analysts' own insights and experiences. Therefore, they are for educational purposes only.
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