Everyone should have a long-term investment horizon. But we also have different time horizons for different goals and need to be aware of how those horizons change.
Financial advisers are always telling their clients to invest for the long term. It is important to think about returns over 15 or 20 years, not what happens on the markets from day to day.
This is referred to as having a long-term time horizon. Since you are thinking about your finances well into the future, you should invest in the stock market where long-term returns will be better, even if there is more volatility in the short term.
Generally, this is great advice. Many investors have compromised their wealth by reacting to short-term market movements and buying or selling at the wrong time; or by keeping their money in cash and earning below inflation returns.
However, as a single piece of advice it can also be too simplistic. That is because every investor has a number of different time horizons, requiring different approaches. There is also the risk that your time horizon changes, or that it might suddenly be shortened by something outside of your control.
Matching your horizon to your strategy
This is called horizon risk — that your time horizon and your investment strategy don’t match.
It’s all well and good to invest for the long term when you are building a pot of money for when you are no longer working. But not all of your financial needs are only going to be 20 or 30 years into the future.
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