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What is an Investment Horizon?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 31 October 2016
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    Conjecture Corporation
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Also known as a time horizon, an investment horizon is the window of time that an investor will hold on to a security or maintain a portfolio without making any changes to any of his or her holdings. The duration of the horizon is an important element in the process of portfolio management, since the idea is to generate as much return as possible, taking into consideration the amount of risk that the investor is willing to assume. Depending on the type of security, and the individual strategy of the investor, an investment horizon may last a matter of hours, or even years.

Various types of securities may have a built-in investment horizon. This is true with bond issues, which come with a maturity date. In most cases, obtaining the highest rate of return from a bond issue requires that the security be held until the bond reaches full maturity. However, this window of time is not quite so easy to determine with other types of investments.

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When selecting investments for a retirement plan, such as a 401(k) or a personal pension plan, an investor would likely include at least some equities in the portfolio. Securities like this type are excellent choices as long-term investments, in spite of their generally higher volatility, since they will generate a steady return over time. Thus, the investment horizon for equities in this situation may be as much as thirty years. Since the investor nears retirement age, he or she may choose to trade in the equities and go with fixed income investments that will generate income on a regular basis.

By the same token, equities tend to not have a short-term investment horizon, so they are less attractive to anyone who is thinking in terms of buying and selling assets on an ongoing basis. When the strategy calls for using a relative short investment horizon, the investor is likely to search for stock options that are expected to increase in value for a few days or weeks, peak, then decrease in value. Here, the object is to acquire those stocks just before the upswing begins, hold them until just before they reach their peak, then sell them at a profit before they begin to decrease in value once again.

As part of the technical analysis of any portfolio, determining the investment horizon associated with each investment option is very important. By determining how long it would be in the best interests of the investor to hold on to the security after acquisition, it is much easier to decide if a given investment is a good fit for the ultimate goals of the investor. Looking closely at this factor will aid the investor in making wise decisions that increase his or her chances of managing the portfolio effectively and efficiently.

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