What is an investment's time horizon?
SAVINGS AND INVESTMENT I July 31, 2020
When a person makes an investment they do so by setting a certain financial objective in advance: saving for retirement, buying a second home, children's education, or making an additional profit that increases your monthly income. Depending on these objectives, the amount of capital they have available and their investment profile, they will choose one type of investment or another, which in turn will have a different recommended time horizon.
The time horizon of the investment is the period of time that the investor is willing to maintain his capital invested, without having to withdraw it for other purposes, with the expectation of obtaining the maximum return for it.
In some cases the time horizon is determined by the product itself. For example, if a 3, 5 or 10 year bond is purchased, the issuer will return the principal plus interest at the end of the 3, 5 or 10 year term. If a six-month deposit is contracted, at the maturity of this term, the investor will recover the capital plus the interest generated. If you wanted to withdraw your money before the deadline, you would probably be penalised.
In other cases, however, financial products do not have a fixed term, such as the shares of a company, which can be bought and sold at any time, and the time horizon of the investment will vary in relation to the intended return objective.
The financial asset or objective will determine the type of time horizon for an investment:
Investments with a time horizon of one year or less. We are talking about assets that allow the capital to be recovered within that period, such as:
Short-term investments can also be made by acquiring shares of companies on the stock exchange; the profitability will depend on the difference between the purchase and sale price of the shares in question.
These are investments that last between one and five years. This is the case, for example, of:
When the time horizon of an investment exceeds five years, we are talking about a long-term investment. Here the range of financial assets is widened:
The time horizon is a key factor when making investment decisions and the time frame for these investments will depend on the objective to be achieved with them.
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