Asset Allocation and Investment Goals

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Asset Allocation and Investment Goals

Some investment goals, such as saving for college or retirement, have well-defined time horizons. You know how many years you have to save to fund education. While you may not know how many years you will enjoy retirement, you certainly do have a good idea how long it will be before you are likely to start drawing on retirement funds. Not all investment goals have well-defined time horizons, and some are more flexible than others. The better you define your investment time horizon, the better you will be able to invest to meet your goal.

How your horizon affects your investing

Investment time horizon affects asset allocation decisions. The longer you have to hold your investments before cashing them in, the greater the opportunity you will have to invest in more volatile investments that historically have provided higher returns. As you approach the time you need to withdraw your funds, the risks of holding more volatile investments increase—especially if you need the funds to meet crucial needs such as living expenses.

It guides your decisions

Your investment time horizon needs to be factored into all investment considerations. For example, if you want to build a vacation home or make another major luxury purchase in five years, you might pursue a relatively aggressive growth investment strategy right up to the time you withdraw your funds. On the other hand, if you might need to access your capital to meet emergency expenses, or if you rely on interest income from your investments to help meet your cost of living, you might wish to protect more of your capital with safer assets, regardless of how long you will be holding them.