Investment Horizon, or investment timeline, is the length of time between when an investor first starts investing vs. when they wish to sell their investments.
For example, a young professional in his 20s investing for retirement has a long investment horizon, around 40 years, as he will not sell his investments until he is around 65.
Longer investment horizons typically lead to portfolios with more stocks than bonds or cash, since risk usually is minimized over time.
Consider, however, another young professional who would like to put a down payment on a house in five years. This shorter investment horizon would likely result in a less risky portfolio composed primarily of bonds and cash.
If this investor was too over-weighted in equities, a sharp equity-market downturn could reduce their assets so that they could not afford the down-payment after five years. However, if they held less risky investments, their downside risk is reduced at the expense of their upside potential.
Investment horizon, along with risk tolerance, is one of the key determinants of an investor’s Asset Allocation.