This is a Wise Way to think about your Investing Time Horizon

Amar Pandit , CFA , CFP

In last Friday’s Nano, I had mentioned about writing an interesting take on calculating your Investment Time Horizon. Based on the posts that I have written; I am sure you have concluded that Time Creates Money and why Leaving Compounding Alone is your best investment philosophy. At the same time, there is often a lot of confusion over one’s investment time horizon as we have not been trained to think about time horizons.

I must tell you this funny incident with a gentleman I met around 14 years back. This person tells me “I have a very long-term horizon for my investments”. I was super impressed but to my next question he responds “Is 12 months a good time horizon? Normally I have 3-6 months, but 12 months seems good to me. What do you think?” I am laughing as I remember this because of the confidence this person had and the way he said it. I politely told him what I thought of a real long-term horizon but realized that getting this gentleman to digest a real long-term horizon would be a tall order. On the other extreme, we have someone like Warren Buffett who says, “My time horizon is forever”. Digesting this for most people will be a tall order too. The reality is that our investing time horizons lie between these 2 extremes and more so leaning towards Buffett’s.

Every person and family are likely to need money at different points of time whether for buying a car, buying a house, child’s education, child’s marriage, or retirement income. These are some of the most common goals people have. Most of these goals have a fixed time horizon. For example, if you plan to send your child abroad at age 18 for his undergraduate, it is a goal that you need to provide for at your child’s age of 18 and not at age 24. Thus, every family will have a very specific time horizon to achieve most of their goals. This means at the end of the time horizon; you are likely spending the money for the stated need and that money is spent.

However, retirement income is a perpetual goal till your last day as you will continue to need income month after month. We have also discussed before how people are living longer and thus the need to provide for a longish period. Thus, this is one goal for which generally people have a real long-term investment time horizon often more than 40-50 years. The purpose of this post is not to tell you where to invest but for you to develop a realistic sense of your investing time horizon especially for retirement. It is this goal that deserves a special mention because this is where most errors happen. We have been trained to think that our time horizon for investing in equity is till we retire and post which we should be moving into debt or bonds. Someone who starts investing at 40 easily has a time horizon of 30-50 years and the magic that compounding can do has been aptly illustrated in last week’s Nano “The Difference between $11.9 million and $84.5 billion.

Ask yourself “What is your Investment Time Horizon?” The reason this is so important is that once you know that it is 40 years, it might help you to not jump off the plane when turbulence hits or worst yet not to get on the plane fearing turbulence will hit.  A critical point that I want to make here tying back to my initial story “The person who mentioned 12 months as long term for equity investments had a trader’s mindset. He did not have an investor’s mindset. He was looking to make a quick buck doing day trading or taking positions for a few months thinking this was investing.” I had asked him “What happens after 12 months? Will you take the money out of everywhere and start consuming it?” He had responded “Oh, no I will again invest.” So why do you say your time horizon is 12 months when it seems to me it is more than 25-30 years. He did not seem to have an answer, but he got the message in that moment of silence and introspection. Most of us have real long-term horizons and once we figure this out, it helps us make wise financial decisions.

Another interesting point is that some people also think that their time horizon extends to their lifetime or their spouse’s lifetime. Nothing could be further from the truth. While there is nothing wrong in thinking and planning for one’s lifetime, thinking for our grandchildren/great grandchildren (who we might never see) or a particular cause that we would love to support can extend our time horizon to almost unimaginable numbers.

I have a 100+ year time horizon for my investments as well as businesses as I believe that we all have gifts that we can give this world while making this a much better place. I cannot recollect where I read it, but someone was talking about a 500 Year Plan. I don’t know how much you might think of it but it’s just an awesome exercise to create your 100 Year Plan to see what you could do with even a small portion of what you have today. I can assure you that you will be blown away with the exercise of seeing the impact you can potentially make.