Starting out
Time horizon
How long until you need the money — the single fact that should shape most of your other decisions.
How it works
Time horizon determines how much short-term volatility you can absorb. Money needed in eighteen months cannot sit in something that routinely falls 30%, however good the ten-year case for it is. Money not needed for thirty years can.
It is also the honest test of a plan. A strategy is only workable if you can stay in it for the whole horizon, including the years it looks wrong. A theoretically superior plan you abandon in year three is worse than a modest one you keep.
Where it misleads people
People describe themselves as long-term investors and then check prices daily. The horizon that matters is the one your behaviour reveals, not the one you claim.
Related terms
- VolatilityHow much an investment’s returns bounce around their average — the standard measure of risk.
- DrawdownThe fall from a portfolio’s previous peak to its lowest point before it recovers.
- Risk toleranceHow much decline you can live through without changing your plan.
- Asset allocationHow you divide money between asset classes — the decision that drives most of your long-run experience.
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Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.