Time Horizon
Time Horizon is the expected period an investor plans to hold an investment before needing the funds, directly influencing asset allocation and risk tolerance, typically categorized as short-term (0-3 years), medium-term (3-10 years), or long-term (10+ years).
Exam Tip
Short-term (0-3) = low risk. Long-term (10+) = higher risk tolerance. Sequence of returns risk increases as horizon shortens.
What is Time Horizon?
Time horizon represents months, years, or decades until funds will be needed. Longer horizons allow greater risk-taking.
Time Horizon Categories
| Category | Duration | Risk Capacity |
|---|---|---|
| Short-Term | 0-3 years | Low - preserve capital |
| Medium-Term | 3-10 years | Moderate - balanced |
| Long-Term | 10+ years | Higher - can tolerate volatility |
Asset Allocation by Time Horizon
| Horizon | Stocks | Bonds | Cash |
|---|---|---|---|
| <3 years | 0-20% | 20-40% | 40-80% |
| 3-10 years | 40-60% | 30-50% | 10-20% |
| 10+ years | 60-90% | 10-40% | 0-10% |
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