Understanding time horizon for your goals

Your time horizon varies based on your goals and circumstances. Different financial goals may require different time horizons.

For example, saving for retirement typically has a longer time horizon compared to saving for a shorter-term purchase, such as the down payment for your first home.

Short-term, mid-term, and long-term goals have different time horizons

When you’re navigating your first home purchase, think of your time horizon as the amount of time between now (or when you start investing for your goal) and when you hope to reach that goal.

Short-term investment strategies often span a few months to a few years. If you're planning a major purchase like a home within the next year, ensuring the safety of your down payment is crucial. Consider low-risk products like a Guaranteed Investment Certificate (GIC) or short-term bonds to protect your funds.

With a medium-term time horizon, which is typically around 3-7 years, you can consider a balanced investment approach that incorporates a mix of low and moderate-risk investments, potentially earning higher returns than short-term alternatives. A diversified portfolio of stocks and bonds can work well, but only if your risk tolerance allows it.

For those with a long-term time horizon extending over a decade or more, there may be more flexibility to explore higher-risk investments that offer the potential for higher returns. However, it's crucial to align your risk tolerance with your investment choices, ensuring they complement your financial objectives without jeopardizing the funds earmarked for your home purchase.

The idea is that a longer time frame provides a cushion to ride out market fluctuations that can come with a more aggressive, stock-focused investment portfolio.

Understanding your time horizon is crucial, especially considering the time value of money. This financial principle highlights that a dollar today can be invested to earn returns over time, while a dollar received in the future holds less value because it cannot be utilized or invested until then.

To illustrate the concept of how money can grow over time when invested, consider the time value of money equation:

Aligning your investment strategy with your time horizon is essential. It can help you make informed decisions regarding your financial goals, risk tolerance, and investment strategy, ultimately paving the way for achieving your dream of homeownership.

Note: The information in this blog is for educational purposes only and should not be used or construed as financial or investment advice by any individual. Information obtained from third parties is believed to be reliable, but no representations or warranty, expressed or implied, is made by Questrade, Inc., its affiliates or any other person to its accuracy.