Why Timeframe is the Most Important Consideration When Investing
19 July 2022
There are many tools that Financial Advisors use to decide what risk profile their client should take however I believe that the most important piece of information when deciding what asset classes you should invest in is the length of time that you plan to invest your money for. The longer the timeframe for investing the higher the risk that you can take. No matter what result you get on the Risk Questionnaire, the fund recommendation I make will depend on whether you advise me that this money will be used to purchase a new car in 2 years’ time or if you wish to save it for your retirement, which probably means you will not access it until at least age 60.
For example, if you make a single premium investment into your pension and you are unable to access your benefits for at least 25 years, stock market volatility is not as big a worry in comparison to a shorter-term investment such as saving for a holiday or a wedding. Risk is determined by measuring volatility and a sharp fall in the value of a long term investment will not have a negative effect if you have many years to recover from these losses. The same is not true for shorter term investments.
As a general rule of thumb, short term investments are investments in which you need to access the money within a 5 year period. With these investments, we do not advise that you take a lot of risk and it is in your best interests to look at deposit accounts or low to medium-risk investment options that will not suffer from sharp falls in value during periods of high stock market volatility.
Intermediate term investments are invested for a period of 5 to 7 years. Some exposure to the stock market can help an investment with this time horizon grow; however, it is recommended that you only place a portion of your investment in a high risk option. For this time frame, you would benefit from a diversified portfolio of investment funds to help protect your investment from any large falls which you may not have the time to recover from.
Long term investments are investments where you do not need to access your money for at least 10 years. As mentioned above, investments like these include long term pension contracts or savings policies for your children’s education. Investing in the stock market offers greater potential rewards and if you can invest your money for a long period of time you have the opportunity to recover from short term falls in value and benefit from long term stock market gains. Although past performance is not a reliable guide to future performance, the stock market always outperforms other asset classes when looking at returns over a longer period of time. It is important to note that as you draw closer to requiring access to the money it is vital to review your investment choices and move to lower risk investment fund options.
Marie Carr MSc BBS QFA RPA SIA is a Qualified Financial Advisor, Retirement Planning Advisor & Specialist Investment Advisor.You can contact her through John F. Loughrey Financial Services by telephone on 074-9124002 or by email on email@example.com