Jeff Clark, CFP®
The first time I went deep-sea fishing I learned a valuable lesson about focus. A few miles out to sea my stomach started doing backflips. Each time the boat crested one wave and plunged towards the next I felt sicker and sicker.
The Captain laughed at me and instructed, “get to the front of the boat son. Stop staring at the waves and look at the horizon. That should keep your breakfast down.”
Lifting my eyes settled me down and kept me from getting sick. The horizon gave me a fixed point of reference in a volatile situation, and reminded me of my ultimate goal: catching a few fish and enjoying my day.
When investing, we recommend the same course of action. Shift your attention from the changing values of your investments each day, and fix your eyes on a point in the distance - your time horizon.
Financial news media will give you many reference points that might make you sick. Endless economic indicators, conflicting forecasts, and trading tips can be unsettling. But the biggest question you should be concerned with is “when do I need this money?”
Focus on Your Investment Time Horizon
Your time horizon is the time period between today and when you’ll need the money for a goal. It’s your deadline. It’s critical for good financial planning because knowing when you need the money for a goal will drive the best investment strategy to reach it.
Investing appropriately can also be complex because most of us have various time horizons for different financial goals.
When you're saving a downpayment to buy a home in a couple years, preserving your money is paramount. A low risk strategy, like a savings account, money market, or CD, will provide a safe place to set aside the money.
On the other hand, money for a retirement goal 25 years from now could be invested in a much more aggressive portfolio including U.S. and International stocks. In fact, as inflation makes your same lifestyle cost more over time, investing in the stock market to grow your money becomes a virtual necessity.
Knowing your time horizon also informs the best account to invest within. If you don’t expect to need money until your 60s, you’ll likely benefit by holding retirement investments in a tax-advantaged account like a 401(k) or an Individual Retirement Account (IRA).
The Importance of Your Time Horizon
Knowing your time horizon reduces indecision and anxiety when investing. A goals-based investing strategy puts your time horizon front and center, aligning each goal with an appropriate investment strategy based on when you hope to reach it.
When you create a goal in BrightPlan one of the first questions we ask is “When do you plan to achieve this goal?” We then recommend an investment plan for the goal with your time horizon in mind, taking into account how much risk you can handle. This recommended mix of stocks and bonds maximizes your expected return for that level of risk.
Short-term goals will mostly hold bonds in a low risk investment plan designed to conserve your money. A long-term goal can target more growth by investing in stocks. Holding more stocks is a little like going deep sea fishing - you’re more likely to experience turbulence on the way to your goal. But those short-term dips are easier to stomach with a long-term perspective.
A Steady Hand at the Tiller
Still, concern is natural when your portfolio value dips. Even when we know better, emotions can take over when things become unstable. Every once in awhile we need a voice to say, “Quit staring at the waves and look at the horizon.” That’s where an investment advisor can help.
Selecting an experienced captain with your best interests in mind can help ensure your investment plan aligns with your goal and time horizon. Your advisor can inform you if a recent downturn has impacted your likelihood of reaching a goal (and if so, what you can do to get back on track).
And finally, your captain can remind you the worst thing to do when waters get choppy is to jump overboard. A steady hand at the tiller helps you remember to stay the course, keep your goals in mind, and never lose sight of the horizon.