4 Key Signs Your Investment Strategy Doesn’t Match Your Time Horizon
Developing a successful investing strategy is an important contributor to long-term financial success.
But if you don’t match your investment objectives with your time horizon, you're likely taking on more risk than you should or not enough to reach your goals. Here are four key signs your investment strategy doesn't match your time horizon.
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1. Market Swings Keep You Up at Night
If you can’t sleep every time the market drops by 10%, your portfolio is likely too aggressive. Over the long run, market drops of 10% and even 20% occur on a fairly regular basis, so it shouldn’t chase you out of your plan if it’s constructed carefully.
If you’re in a panic whenever there’s red on your screen instead of green, it’s a good sign your allocation is mismatched.
2. You’re Trying To Fund Your Long-Term Goals With Cash
Cash seems like a safe investment, but the loss of purchasing power can be a devastating hidden risk. Thanks to the power of inflation, what costs $20,000 today might cost $30,000 in the future, making cash a losing game over the long run.
Cash should be used for short-term goals and funding emergencies. Once inflation and taxes are taken into account, it often provides a negative real return. Investors need growth in their portfolios to fund long-term goals.
3. Your Plan Changes With the Latest Headlines
A good investment plan matches a strategy with a timeline. If you’re regularly changing your allocation between defensive and aggressive on the basis of news headlines or economic reports, you haven’t anchored your financial goals with the right time horizon.
Trading frequently and trading on emotions are two ways that most investors come up short when it comes to achieving their financial goals.
4. You’re Dialing Up Your Risk While Taking Withdrawals
If you’re close to reaching a financial goal, whether it’s buying a house, putting a child through college or retiring, it’s usually a good time to take some risk off the table.
If the markets have a sudden downdraft right before you need the money, they might not have time to recover before you have to start taking withdrawals.
The Fix: Work Backward
One tip to align your investment strategy with your time horizon is to start with when you’ll need the money and work backward. For long-term goals, stick with more growth in your portfolio, as you have time to ride out the ups and downs of the market. But if you need to fund a short-term expense, stability and predictability take precedence.
Whatever your goals are, it’s important to get a plan down in writing and stick to it, often with the help of a financial advisor. While you can never eliminate risk from a portfolio, matching your investment objectives with your time horizon helps ensure you’re taking the appropriate amount of risk for any given situation.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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