“Pick battles big enough to matter, small enough to win.”
—Jonathan Kozol, American writer
The tag line on my blog’s home page reads “Managing portfolios for the long run”. Today, I explore some ideas pertaining to the meaning and implications of “long run” for investors. Mr. Kozol’s wisdom fits in well with the investment time horizon concept.
I describe investment time horizon as the period that you will be investing to achieve a specific financial goal. The most sought after goals are funding retirement, purchasing the family home, funding education pursuits for children and grandchildren, buying the automobile and arranging the emergency account.
The process of identifying risk tolerances and the appropriate investment time horizon establishes your preferred investment strategy.”
For some, time horizon may translate into minutes; for others it may be decades, with everything else in between. Generally, the longer you don’t need your money, the riskier your portfolio can be to fit and deliver within your comfort zone.
Selecting comfortable time horizons allows investors to choose more appropriate investments for the nest egg. However, most people tend to operate within shorter investment time horizons, versus longer ones.
I submit that owning stocks is not suitable for investors having time horizons less than five years. For example, it is not prudent for someone saving to purchase a home to be heavily invested in stocks. A capital loss could dramatically change the desired outcome. This investor is better served by cash and money market deposits.
The debate for investing within a long time horizon is that years are available to recover after a loss. At first blush, someone at age 40 and wanting to retire at 60 has a 20 year time horizon. However, I would also argue that time horizon can be stretched to age 80 and beyond, depending on longevity of both spouses or partners.
Families who make use of family trust provisions may further extend time horizons to include the time contemplated to distribute the trust assets. Hence, there is plenty of opportunity to plan activities that make use of long time horizons.
Time horizon guidelines
Time horizons have been developed and tweaked over years and decades. My interpretations are based primarily on past experiences and outcomes. Investment professionals may emphasize other planning implications.
Let’s ballpark commonplace investing time horizons:
||Typical Investing Period
|Ultra Short Term
||Up to 2 months
||Up to 3 years
||Up to 7 years
||Up to 20 years
|Ultra Long Term
||Up to 40 years, or more
Investment time horizons vary widely. For instance, the day trader mentality may buy and sell before the end of the trading session. The upper end is the pension plan style of management that spans 30 to 50 years, or more. There is much to be learned from the planning and investing discipline of pension plan managers. Someone aiming to accumulate and spend the retirement nest egg over a lifetime ought to easily adopt the ultra long term view.
Investing is a journey that typically begins around age 25 to 30. The marathon can easily last to age 80, often much longer. Serious investing starts in earnest during the 40’s. Generally, 15 to 20 years of consistent and dependable saving capacity are required to fund retirement portfolios. I would also argue that the normal retirement age of 65 is shifting towards age 70 for many. Furthermore, long spells of low return environments may increase the required time for saving capacity to the 25-year ballpark.
Investors who have mastered the art and science of a comfortable asset mix, together with broad diversification and rebalancing have the upper hand. These three strategies alone significantly help investors in staying out of trouble. It is a very powerful combination. Those that endured the 2008 market corrections can attest to this wisdom.
Your mission critical is to align investment risks incurred with the appropriate time horizon. I highlight the range of asset allocation targets that assist in determining time horizon:
- Investing time horizon less than five years implies that you cannot afford to incur a major capital loss. Allocation to stocks is likely under 20%.
- Investing time horizon around 10 years affords more reasonable tolerances for losses. Allocation to stocks likely increases to around 50%.
- Investing time horizon of 15 or more years is better able to withstand prolonged market mayhem. Allocation to stocks could reach 70%.
Part of this process is learning how to refrain from making knee-jerk moves. You should not have need to react to every market hiccup. Risk management is top priority in designing and implementing your investment strategy. Don’t drown trying to come to grips with the daily doses of headlines. I see them as added distractions you don’t need. My preferred approach is to ignore them and pay attention to trend lines instead.
In my experience, most investors feel comfortable having 40% to 60% allocated to stocks and the remainder to bonds and cash instruments. This implies an investment time horizon at least in the 10 to 20 year ballpark. Thinking in decades takes some getting used to not tinkering with the portfolio. Starting the investing process at age 30 and living to age 90 could place you firmly at the helm for six decades.
I recommend that every effort be made to migrate investment time horizon into decades, not just days, months or a few years. I’m sticking with embracing the “Managing portfolios for the long run” approach.
Concentrate on feeling at ease with the risks you incur and the chosen investment time horizon. They assist in constructing a comfortable investment strategy for your long term requirements. Further, they help immensely in deciding how to invest logically, be it seeking capital preservation or long term growth activities.
I welcome your questions, feedback and comments.