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Planning Ahead: Look Toward the Investment Horizon

What is your investment horizon? It can have a profound impact on the type of investments you include in your portfolio.

Basic definition: Simply put, an investment horizon (also called a "time horizon") is the length of time-generally spelled out in years-in which you have to invest before you will need to draw on the funds. For example, if you are age 45 years and plan on retiring in 20 years, your investment horizon may be stated as 20 years.

Your investment horizon is also affected by the duration of time over which you expect to use the money. For instance, if you expect to retire in 20 years and live for another 25 years after that, your investment horizon is 20 years, but your actual need for income is extended 25 years. Although you may need some of the money upfront, the balance can be invested for future withdrawals.

As a general rule, the longer your investment horizon, the more aggressive you can be as an investor. That's because you have more time to recover from the inevitable ups and downs of the equities markets. That's not to say we are advocating mere speculation. But investors with a long time horizon are more likely to aim for higher returns than investors who are near or in retirement. Conversely, the conventional thinking is that investors with a short time horizon tend to be more conservative.

Of course, everyone has a different risk tolerance. Your risk tolerance, in combination with your investment horizon, will have a major impact on your investment decisions.

Note that your circumstances may change as time goes on. For example, you might extend your investment horizon by postponing retirement for a few years. This extra time earning a salary gives you a chance to increase your nest egg for retirement. On the other hand, you may decide that you want to retire early-perhaps in your early to mid-fifties-which could drastically reduce your time horizon.

Each separate financial goal has a separate investment horizon. If you are saving for a child's college education and the child is ten years old, your investment horizon for that objective is only around eight years. To help accomplish each goal, you might establish a separate savings plan.

Of course, everyone's situation is different. In any event, you should have your portfolio customized to meet your specific needs and objectives.

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