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.

Types of time horizon

The financial asset or objective will determine the type of time horizon for an investment:

Short term. 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 fixed deposits: the capital remains fixed for a period of time (six months, one year) and the interest will be paid on the maturity date.
  • Treasury Bills: public debt securities issued in the short term (three, six, nine or twelve months) and issued at a discount. The difference between the redemption value of the bill at maturity and the price paid at acquisition will be the yield generated.
  • One-year bonds: these are debt issues by public institutions or private companies; the issuer undertakes to repay the capital plus interest within the period indicated for maturity.

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.

Medium term. These are investments that last between one and five years. This is the case, for example, of:

  • Investment Funds. The documentation associated with each investment fund (Prospectus and Fundamental Data for Investors (DFI) document) indicates its characteristics and conditions as well as the recommended time horizon (three, five years), which will vary depending on the characteristics of the assets in its portfolio. The choice between different types of funds should be made taking into account the investor's willingness and ability to take risks, as well as their return expectations and investment time horizon. You can find further information regarding the different types of funds available on our website.
  • Government Bonds: These are issues of government Treasury debt with a term of between two and five years. They pay interest annually, in the form of an annual coupon, instead of at maturity.

Long term investmentsWhen 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:

  • Investing in gold, an asset with a historically more stable value and immediate liquidity.
  • Government bondsover 10, 15, 30 and 50 years, which, like government bonds, pay regular interest (annual coupon).
  • Shares or other variable income products: its profitability will depend on the performance of the stock markets at any given time.

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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