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Knowing your investing time horizon helps tamp down the distractions from the daily happenings within the financial markets. Even a cursory glance at the headlines in financial publications or coverage on financial TV channels yields a wide array of predictions and noise concerning the short-term direction of the markets. What’s usually missing is any discussion about the importance of understanding time horizon when making investment decisions.
Many investing disagreements are just people talking about their different time horizons. All of us have different aspirations, different worries, and different risk capabilities. These factors translate into different investing time horizons.
Firmly embedded within your investing time horizon is an element of uncertainty. You don’t know, (and neither does anyone else), if you will be around for days or decades. This unknowability is where many investors get tripped up.
You can make all types of assumptions about your longevity based on health and family history, but there still remains a large component of uncertainty. You simply don’t know.
Many years ago, we worked with a client who was obsessed about retirement planning for a specific age when he expected to die. The date he was aiming for was the age his father died. He figured that would probably be the age he would also die. He moved across the country years ago and we lost track of him.
A couple years ago, I ran into one of his family members at a restaurant and they reported he was still alive, probably a decade beyond his planned demise. Time horizons are just educated guesses, not a math equation that renders a concrete answer.
It’s crucial to acknowledge uncertainty and factor that into your investing time horizon.
Our former client thought his time horizon was much shorter than it actually was, and this impacted his approach to risk. One of the byproducts of focusing on a short investing time horizon is that it amplifies quarter-to quarter uncertainty.
If you can ignore short-term uncertainty and concentrate on the long haul, you have a much better opportunity to capture the premium long-term returns of the stock market. On the other hand, if you avoid uncertainty that likely will cost you returns in the long-term.
If your ultimate goal is to sustain your lifestyle, including inflation, throughout retirement, that might indeed translate into an investing time horizon that’s decades long. Don’t focus on trying to ‘optimize’ your investing, but rather ‘right size’ your investing approach based on your unique time horizon.
Planning for your financial future can be complicated but knowing your investing time horizon helps the process. Try to balance your long-term aspirations and your short-term pain points as you craft a path forward. Start there.
Related: Getting To Know Your Future Self